The Metropolitan Bus Company (MBC) purchases tires from Bolt Tires (BT). Annually MBC needs 1000 tires, and on average a tire costs $125. BT charges MBC a processing fee of $20 per order. This fee is independent of the number of tires ordered. Holding cost is 20% of the cost of the tire per year. Assume that MBC operates 250 days a year.
1. What is MBC’s order quantity if it wishes to minimize the sum of annual holding cost and annual ordering cost? You have to calculate the EOQ here.
For the questions below, assume that MBC uses the order quantity that you calculated in (a).
2. What is the number of orders that will be placed annually?
3. What is the time (number of working days) between consecutive orders?
4. What is MBT’s average inventory?
5. MBC currently orders in quantities of 100. How much will it save or lose by switching to the order quantity that you calculated in (a)? For this, you have to calculate the total cost with the order quantity of 100 and compare it with the total cost for the optimal order quantity (EOQ).
6. Suppose the tire supplier has a lead time of 4 days. What is MBT’s reorder point?