17. San Antonio Transit purchases diesel fuel from Texas Petroleum Supply. In ad
ID: 3282884 • Letter: 1
Question
17. San Antonio Transit purchases diesel fuel from Texas Petroleum Supply. In addition to the fuel cost, Texas Petroleum Supply charges SAT $250 per order to cover the expenses of delivering and transferring the fuel to SAT's storage tanks. The lead time for a new shipment from Texas Petroleum is 10 days; the cost of holding a gallon of fuel in the storage tanks is $0.04 per month, or $0.48 per year; and annual fuel usage is 150,000 gallons. SAT buses operates 300 days a year. a. What is the optimal order quantity for SAT? b. How frequently should SAT order to replenish the gasoline supply? The SAT storage tanks have a capacity of 15,000 gallons. Should SAT consider expanding the capacity of its storage tanks? c. d. What is the reorder point?Explanation / Answer
Answer to question a :
Given are following data :
Co = Ordering cost = $250
Ch = Annual unit Gallon holding cost = $0.48
D = Annual fuel usage = 15,000 Gallons
Thus Optimal Order Quantity as per Economic Order Quantity ( EOQ ) Model :
EOQ = Square root ( 2 x Co x D/Ch )
= Square root ( 2 x 250 x 15,000/ 0.48 )
= 3952.84 ( 3953 rounded to nearest whole number )
OPTIMAL ORDER QUANTITY FOR SAT = 3953
Answer to question b :
SAT buses operate 300 days during which 15,000 Gallons of fuel are required
Thus daily requirement of Gasoline = 15,000/ 300 = 50
Hence frequency at which SAT should order
= EOQ/ Daily requirement
= 3953/50
= 79.06 days
SAT SHOULD ORDER AT FREQUENCY OF 79.06 DAYS
Answer tot question c :
Since the quantity which is ordered every time at EOQ level i.e. 3953 Gallons is less than 15,000 Gallons which is the tank capacity , SAT need not consider expanding the capacity of storage tank.
Answer to question d :
Reorder point - = Average daily demand x Lead time ( days)
= 50 x 10
= 500 Gallons
REORDER POINT = 500 GALLONS
OPTIMAL ORDER QUANTITY FOR SAT = 3953
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