Question

A local service station is open 7 days per week, 365 days per year. Sales of 10W40 grade premium oil average 25 cans per day. Inventory holding costs are $0.75 per can per year. Ordering costs are $9 per order. Lead time is 1.5 weeks. Backorders are not practical – motorists drive away.

Assuming deterministic demand, calculate the economic order quantity and reorder point.

Answer 1

The economic order quantity is approximately 390 cans, and the reorder point is approximately 263 cans.

Step-by-step explanation:

To calculate the economic order quantity, we can use the formula:

`EOQ = √((2 * D * S) / H)`

Where:

D = annual demand (365 days * 25 cans per day)

S = ordering cost per order

H = holding cost per can per year

Plugging in the values, we get:

`EOQ = √((2 * 365 * 25 * 9) / 0.75)`

= 390.39

Therefore, the economic order quantity is approximately 390 cans.

To calculate the reorder point, we can use the formula:

Reorder Point = Lead Time Demand

Where:

Lead Time Demand = Lead time in weeks * average daily demand (1.5 * 7 * 25)

Plugging in the values, we get:

Reorder Point = 1.5 weeks * 7 days * 25 cans per day = 262.5

Therefore, the reorder point is approximately 263 cans.