Chapter 15, Problem 15.2STP

EOQ analysis

Thompson Paint Company uses 60,000 gallons of pigment per year. The cost of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1 per gallon per year. The firm uses pigment at a constant rate every day throughout the year.

1. a. Calculate the EOQ.
2. b. Assuming that it takes 20 days to receive an order once it has been placed, determine the reorder point in terms of gallons of pigment. (Note: Use a 365-day year.)

Summary Introduction

To determine: The Economic order quantity (EOQ).

Answer to Problem 15.2STP

The Economic order quantity (EOQ) is 4,899 gallons.

Explanation of Solution

Given information:

Annual usage: 60,000 gallons

Ordering cost: $200 per gallon

Carrying cost:$1.00 per gallon

Calculation of the EOQ:

$\begin{array}{c}EOQ=\sqrt{\frac{\text{2}\text{×}\text{Annual}\text{usage×}\text{Odering}\text{cost}}{\text{Carrying}\text{cost}}}\\ =\sqrt{\frac{2\times 60,000\times \$200}{\$1.00}}\\ =4,899\text{gallons}\end{array}$

Therefore, the EOQ is 4,899 gallon..

Summary Introduction

To determine: The reorder point in terms of gallons of pigment, if it take 20 day to r3ecive pigment per year.

Answer to Problem 15.2STP

The reorder point in terms of gallons of pigment, if it take 20 day to r3ecive pigment per year is 3,287.6 gallons.

Explanation of Solution

Lead time: 20 days.

Calculation of the daily usage:

$\begin{array}{c}\text{Daily}\text{usage=}\frac{\text{Annual}\text{usage}}{\text{365}}\\ =\frac{60,000}{365}\\ =164.38\end{array}$

Calculation of the reorder point:

$\begin{array}{c}\text{Reoder}\text{point}=\text{Lead}\text{time×}\text{daily}\text{usage}\\ \text{=}\text{20}\text{days×}\text{164}\text{.38}\text{gallon}\text{per}\text{days}\\ \text{=}\text{3,287}\text{.6}\text{gallon}\end{array}$

Therefore, the reorder point is 3,287.6gallons.