Question

The Oklahoma Crude Oil Refinery buys crude oil from the Red Rock oil field located in eastern New Mexico, western Texas, and western Oklahoma. The refinery has been guaranteed through long-term supply contracts that its needs for crude will be supplied from this field at $18.90 per barrel as long as the refinery accepts 5,000 barrels per day during shipping periods. The refinery uses crude oil at a rate of 1,500 barrels per day and plans to purchase 450,000 barrels from the Red Rock field next year. If the carrying cost is 20 percent of acquisition cost per unit per year and the ordering cost is $2,500 per order:  

Question 21:- What is the EOQ model to be used in this case?  
a) Basic EOQ
b) Production Quantity Model(EOQ for lot)
c) Single Period Model
d) Price Break Model

Question 22:- What is the EOQ for Red Rock crude?  
a) 30,160.59 barrels
b) 28,160.59 barrels
c) 29,160.59 barrels
d) 27,160.59 barrels

Question 23:- What is the Total cost of the inventory at the EOQ?  
a) Rs. 77,158.92 per year
b) Rs. 79,158.92 per year
c) Rs. 77,65092 per year
d) Rs. 77,358.92 per year

Question 24:- How many days of production are supported by each order of Red Rock crude?  
a) 20.11 days
b) 18.44 days
c) 19.76 days
d) 19.44 days

Question 25:- How much storage capacity is needed for the crude?  
a) 22,412.4 barrels
b) 20,412.4 barrels
c) 20,812.4 barrels
d) 19,412.4 barrels

Answer 1

21. b) Production Qty Model (EOQ for lot)

Supply is fixed per day during shipping period so it is similar to Production Model.

22. c) 29160.59 barrels

Supply Rate (p) = 5000 barrels per day

Demand (d) = 1500 barrels per day

Annual Demand (D) = 450,000

Cost per Order (S) = $2500

Annual Holding Cost per barrel = 20% of cost per barrel = 0.20*18.90 = $3.78

Q = SQRT(2*S*D/(H*(1-d/p))) = SQRT(2*2500*450000/(3.78*(1-1500/5000))) = 29160.59 barrels

23. a) 77158.92

Ordering Cost = (D/Q)*S = (450000/29160.59)*2500 = 38579.46

Holding Cost = (Q/2)*(1-d/p)*H = (29160.59/2)*(1-1500/5000)*3.78 = 38579.46

Total Cost = Ordering Cost + Holding Cost = 38579.46 + 38579.46 = 77158.92

24. d) 19.44 days

No. of days supported by each order = Q/d = 29160.59/1500 = 19.44 days

25. b) 20412.4 barrels

Storage Capacity = Max Inventory level = Q*(1-d/p) = 29160.59*(1-1500/5000) = 20412.4 barrels