To limit dependence on imported oil, the Four Corners Power Company has decided to cover a fixed part of the regional demand for electricity by using coal. The annual demand for coal is estimated to be 500,000 tons, which are used uni-formly throughout the year. The coal can be strip- mined near the power- generating plant and delivered with a setup requiring 2 days for a cost of $ 2,000 per mining run. Holding coal in inventory costs approximately $ 3.00 per ton per year.
a. Determine the economic order quantity for coal assuming 250 workdays per year.
b. Assume the daily demand for coal is distributed normally, with mean of 2,000 tons and standard deviation of 500 tons. What quantity should be set as safety stock to guarantee a 99 percent service level?
c. If the coal were mined in quantities of 50,000 tons per order, a savings of $ 0.01 per ton could be passed along to the power company. Should Four Corners Power Company reconsider its coal production quantity as calculated in part a?
d. What would be the basis for determining the cost of a coal stockout for Four Corners Power Company?

  • CreatedAugust 22, 2015
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