As an inventory control manager, you are responsible for determining purchase quantities for commodities used in the plant. One such item is a specialty machine oil. You pay 5 $/gal for this oil when it is purchased. Storing the oil costs your company 25% of unit cost per year. Ordering costs average 10 $/order. Each year the company uses about 500 gallons. Determine:
a) How many gallons (EOQ) should be ordered each time to minimize inventory costs.
b) The oil is only sold in and delivered in 55 gallon drums. How many drums should be ordered per order to minimize costs? Hint: Determine TC for full drum quantity above and below the EOQ quantity. Choose the lower TC.
c) Using a spreadsheet, make a graph of order cost, carry cost, and total cost versus quantity ON ONE CHART. Identify all three cost curves in the legend box, label all axes and titles, include major gridlines for both vertical and horizontal grids, use a quantity range from 15 to 130 units incrementing by 5 units (i.e., x values starting at 15, then 20, 25, 30, 35, etc, to 130). Also, use spreadsheet tools to put an unfilled circle around the intersection of the carry costs and the order costs.
d) What impact (determine by percentage) will the purchasing of the oil in 55 gallon drums as compared to the cost if using an EOQ quantity (when making the comparison, only use the pertinent TC’s, do not use TIC’s).