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.

1. What is the optimal order quantity for MBC?
   
   Q* =  
   
2. How frequently should MBC order to replenish the gasoline supply?
   
   orders per year
   
3. 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.
   
4. 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.