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 $95 each. The firm uses 4,800 canisters per year. The controller estimates that it costs $150 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4 per canister.

Required:

1. Write the formula for the total annual cost of ordering and storing XL-20.

2. Use the EOQ formula to determine the optimal order quantity.

3. What is the total annual cost of ordering and storing XL-20 at the economic order quantity?

4. How many orders will be placed per year?

5. Fiber Technology’s controller, Jay Turnbull, recently attended a seminar on JIT purchasing. After-ward he analyzed the cost of storing XL-20, including the costs of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was $19.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technology’s purchasing manager. Together they contacted Reno Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $20. Using these new cost estimates, Turnbull computed the new EOQ for XL-20.

a. Use the equation approach to compute the new EOQ.

b. How many orders will be placed per year?