A local Amoco station sells 1,600,000 gallons of regular unleaded gasoline each

Question

A local Amoco station sells 1,600,000 gallons of regular unleaded gasoline each year and uses a (Q,R) policy to manage its inventory. The station’s estimated cost for placing an order is $72; its purchase cost is 91.9 cents a gallon; and its selling price is 106.9 cents a gallon. The costs associated with maintaining a gallon of gasoline in inventory is annualized at $0.40/gallon-year. If Amoco were to run out of gas, it would lose all sales until its inventory was replenished.

what is the cycle service level (B/(B+C)?

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Explanation / Answer

Following details have been provided ;

Selling price of Gasoline = P = 106.9 cents per Gallon

Cost of purchase of Gasoline = C = 91.9 cents per Gallon

Salvage price of Gasoline S = 0 ( since it will lose all sales if it runs out of Gas )

Therefore,

Underage cost = Cu = P – C = 106.9 – 91.9 = 15 cents

Overage cost = Co = C – S = 91.9 – 0 = 91.9

Therefore,

Cycle service level = Cu/ Cu + Co = 15/ ( 15 + 91.9) = 15/106.9 = 0.1403

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