Fiber Technology, Inc., manufactures glass fibers used in the communications ind
ID: 374470 • Letter: F
Question
Fiber Technology, Inc., manufactures glass fibers used in the communications industry. The company's materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-pound canisters for $100 each. The firm uses 4,400 canisters per year. The controller estimates that it costs $155 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4.00 per canister.
Now also assume that the lead time required to receive an order of XL-20 is one month.
Required:
3.Suppose that monthly usage of XL-20 fluctuates between 267 and 467 canisters, although annual demand remains constant at 4,400 canisters. What level of safety stock should the materials and parts manager keep on hand for XL-20? What is the new reorder point for the chemical?
Explanation / Answer
current Reorder point = demand during lead time
lead time = 1 month
demand during lead time = annual demand/12 = 4400/12 = 366.67 = 367 units
now since the monthly demand varies between 267 and 467. we need to have a safety stock.
safety stock = maximum monthly demand - reorder point = 467 - 367 = 100
safety stock = 100
New reorder point = old reorder point + safety stock = 367 + 100 = 467 units
new reorder point = 467
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