Hartley Incorporated buys plastic resin by the ton and then packages and distrib

Question

Hartley Incorporated buys plastic resin by the ton and then packages and distributes it in smaller amounts to industrial users. The resin typically costs $50 per ton, and Hartley uses 80,000 tons each year. Placing an order for more resin costs $500 in allocated labor cost for purchasing personnel. Holding costs for the resin are estimated at 1 percent of the product value each month. Hartley operates 365 days a year. a. How much resin should Hartley order each time? b. What will be the average inventory and annual holding cost?

Explanation / Answer

Annual demand (D) = 80000 tons

Ordering cost (S) = $500

Holding cost (H) = 1% of cost per month = 12% of cost per year = 12% of $50 = $6

a) Economic order quantity(Q) = sqrt of (2DS / H)

= sqrt of [(2 x 80000 x 500)/6]

= 3651.48 or rounded to 3651 tons

So Hartley should order 3651 tons of resin each time.

b)Average inventory = Q/2 = 3651/2 = 1825.5 tons

Annual holding cost = Average inventory x H

= 1825.5 x $6

= $10953

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