Optimal Order Quantity Calculation for Metropolitan Bus Company
a. What is the optimal order quantity for MBC?
b. How frequently should MBC order to replenish the gasoline supply?
c. Should MBC consider expanding the capacity of its storage tanks?
d. What is the recorder point?
Answer:
The MBC data is given below:
Demand Rate, D = 240,000 gallons per year
Setup cost, S = $300 per order
Holding cost, H = $0.36 per year
Number of operating days = 300 days a year
Lead time, L = 10 days
a) Calculate the optimal quantity for MBC as follows:
EOQ = √[(2 * D * S) / H]
EOQ = √[(2 * 240,000 * 300) / 0.36]
EOQ = √(144,000,000 / 0.36)
EOQ = √400,000
Therefore, the optimal order quantity for MBC is 20,000 gallons.
b) Calculate the order frequency MBC should order to replenish the gasoline supply as follows:
Order frequency = Demand rate / EOQ
Order frequency = 240,000 / 20,000
Order frequency = 12
Therefore, the order frequency MBC should order to replenish the gasoline supply is 12 orders per year.
c) Should MBC consider expanding the capacity of its storage tanks?
The quantity ordered at EOQ level (20,000 gallons) is well below the capacity of 240,000 gallons in the storage tanks. Therefore, MBC does not need to consider expanding the capacity of its storage tanks.
d) Calculate the reorder point as follows:
Reorder point = Average daily demand × Lead time
Reorder point = (Demand rate / Number of operating days) × Lead time
Reorder point = (240,000 / 300) × 10
Reorder point = 800 × 10
Reorder point = 8,000 gallons
In conclusion, the Metropolitan Bus Company can optimize its ordering process by ordering 20,000 gallons of gasoline per shipment and placing orders 12 times a year to replenish the supply. The current storage tank capacity of 240,000 gallons is sufficient to accommodate the ordered quantity without the need for expansion. Additionally, the reorder point is set at 8,000 gallons to ensure timely order placements to meet demand and avoid stockouts. By following these calculations and recommendations, MBC can streamline its fuel procurement process and maintain efficient operations.