[The following information applies to the questions displayed below.] Fiber Tech

Question

[The following information applies to the questions displayed below.]

Fiber Technology, Inc., manufactures glass fibers used in the communications industry. The company's materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-pound canisters for $103 each. The firm uses 5,200 canisters per year. The controller estimates that it costs $158 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4.80 per canister.

Now also assume that the lead time required to receive an order of XL-20 is one month.

Required:

Assuming stable usage of XL-20 each month, determine the reorder point for XL-20.

Suppose that monthly usage of XL-20 fluctuates between 333 and 533 canisters, although annual demand remains constant at 5,200 canisters. What level of safety stock should the materials and parts manager keep on hand for XL-20? What is the new reorder point for the chemical?

Explanation / Answer

Reorder Point = Average Daily unit sales X Delivery Lead Time
                     = (5200/360) X 30 days           (Assumed 360days in a year)
                     = 433.33 or 433 canisters

Safety Stock= (Maximum daily usage X Maximum lead time) - (Average daily usage X Average lead time)
                   = ((533/30) X 30) - (5200/360 X30)
                  = (533 - 433) = 100 canisters

New Reorder point = 433 + 100 = 533 cannisters

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