JAL Trading is a Hong Kong manufacturer of electronic components. During the cou
ID: 444604 • Letter: J
Question
JAL Trading is a Hong Kong manufacturer of electronic components. During the course of a year it requires container cargo space on ships leaving Hong Kong bound for the United States, Mexico, South America, and Canada. The company needs 280,000 cubic feet of cargo space annually. The cost of reserving cargo space is $7000 and the cost of holding cargo space is $0.80/ft3. Determine how much storage space the company should optimally order, the total cost, and how many times per year it should place an order to reserve space.
Explanation / Answer
Economic order quantity = ( 2 x annual demand x order cost / annual reserving or holding space cost ) ^ 0.5
= ( 2 x 280000 x 7000 / 0.8 ) ^ 0.5 = 70,000 ft3
Number of orders placed in 1 year = 280000 / 70000 = 4
Total cost per annum = 280,000 x 0.8 = 224000 $ + 7000 $ = 231000 $
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