Question

# The Metropolitan Bus Company (MBC) purchases diesel fuel from American Petroleum Supply. In addition to the...

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

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.

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