Economic order quantity: equation approach; effects of JIT purchasing: manufacturer Rally Communications Company manufactures glass fibres used in the communications industry. The company's materials and parts manager is currently revising the inventory ordering policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-kilogram canisters for $190 each. The firm uses 4800 canisters per year. The accountant estimates that the incremental costs of ordering and receiving XL-20 are $300 per order. The annual cost of storing XL-20 is $8 per canister
Required: 1 Use the EOQ formula to determine the optimal order quantity for XL-20.
2 What is the total annual cost of ordering and storing XL-20 at the economic order quantity?
3 How many orders will be placed per year?
4 Rally's accountant, Frank Mallard, recently attended a seminar on JIT purchasing. Afterwards, he analysed the cost of storing XL-20, including the cost of wasted space and inefficiency. He was shocked to find that the real annual carrying cost was $40 per canister. Mallard then met with Doug Kaplan, Rally's purchasing manager. Together they contacted Chemical Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $60.
(a) Calculate the new EOQ for XL-20.
(b) How many orders will be placed per year?