Question

The Metropolitan Bus Company (MBC) purchases diesel fuel from American Petroleum Supply. In addition to the fuel cost, American Petroleum Supply charges MBC $450 per order to cover the expenses of delivering and transferring the fuel to MBC's storage tanks. The lead time for a new shipment from American Petroleum is 10 days; the cost of holding a gallon of fuel in the storage tanks is $0.07 per month, or $0.84 per year; and annual fuel usage is 210,000 gallons. MBC buses operate 210 days a year.

- What is the optimal order quantity for MBC?

*Q**= - How frequently should MBC order to replenish the gasoline
supply?

orders per year - The MBC storage tanks have a capacity of 15,000 gallons. Should
MBC consider expending the capacity of its storage tanks?

Metropolitan Bus Company the capacity of its storage tanks. - What is the reorder point?

*r*= gallons

Answer #1

a). EOQ = sqrt [(2*S*D)/H]

= sqrt [(2*210,000*$450)/$0.84]

= sqrt [225,000,000] = 15,000 units

b). Number of Orders per Year = D / Q* = 210,000 / 15,000 = 14 orders per year

c). As Optimal Order Quantity for Metropolitan Bus Company equals 15,000 gallons, and its storage tanks capacity – 15,000 gallons (which satisfies the optimal quantity), MBC should not consider expanding the capacity of its storage tanks.

d). r (Reorder point) = d * m = (210,000 / 210) * 10 = 1,000 * 10 = 10,000 gallons.

The Metropolitan Bus Company (MBC) purchases diesel fuel from
American Petroleum Supply. In addition to the fuel cost, American
Petroleum Supply charges MBC $225 per order to cover the expenses
of delivering and transferring the fuel to MBC's storage tanks. The
lead time for a new shipment from American Petroleum is 10 days;
the cost of holding a gallon of fuel in the storage tanks is $0.07
per month, or $0.84 per year; and annual fuel usage is 105,000
gallons....

The Metropolitan Bus Company (MBC) purchases diesel fuel from
American Petroleum Supply. In addition to the fuel cost, American
Petroleum Supply charges MBC $450 per order to cover the expenses
of delivering and transferring the fuel to MBC's storage tanks. The
lead time for a new shipment from American Petroleum is 10 days;
the cost of holding a gallon of fuel in the storage tanks is $0.07
per month, or $0.84 per year; and annual fuel usage is 210,000
gallons....

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