Consider a firm that purchases polystyrene as a raw material for use in a styrofoam plant. The plant runs 250 days a year. Polystyrene costs $1,500 per ton and the plant uses 125,000 tons per year. Delivery charges consist of a "per ton" charge, which is included in the material costs, plus a fixed charge of $225 for each delivery, which covers paperwork, receiving expenses, and so forth. The firm uses a 15 percent carrying cost rate for inventory.
A. Use the EOQ model to compute the batch size that minimizes the sum of the holding plus ordering costs.
B. How many days of supply does the above batch size represent?
C. Suppose the firm decides for convenience to have polystyrene delivered every other day. What will the batch size be and how much will this cause the total (holding plus ordering) cost to increase?