8. Mr. Smith owns a chain of fast food franchises across the city. One thousand

Question

8. Mr. Smith owns a chain of fast food franchises across the city. One thousand litres of Acme All Purpose Cleaner are used at a uniform rate in the restaurants throughout the year. The cleaner comes in 10-litre containers and costs $1.10 per litre. Every time the cleaner is pur- chased, ordering costs of $7.50 are incurred. Annual storage costs for the cleaner based on aver- age inventory are $0.75 per container. Carrying charges for the cleaner (cost of money tied up in inventory) are 15 percent of purchase price. In order to protect himself against delivery delays, Mr. Smith maintains a 20-litre safety stock. Determine the most economical order size for the cleaner.

Explanation / Answer

Annual Demand (D) = 1000 litres = 100 containers

Container cost = 10*1.1 = 11 $

Ordering cost (S) = 7.5 $

Storage cost per container = 0.75 $

Carrying charges = 0.15*11 = 1.65 $

Holding cost per container (H) = 0.75+1.65 = 2.4 $

Safety stock = 20 litres = 2 containers

EOQ = SQRT(2*D*S/H).= SQRT(2*100*7.5/2.4) = 25 containers = 250 litres

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