Question

Jack owns a local trucking company. With fuel costs being expensive, Jack wants to evaluate how much fuel, on average, he should store in his 9,000 gallon fuel tank. Each year Jack uses 90,000 gallons of diesel (usage is spread evenly throughout the year). Jack knows with certainly that he can have a load of fuel delivered in 5 days. The price of fuel is $3.09 per gallon and there is a separate $120 ordering fee per order. Jack thinks his holding cost per unit is 30%. If Jack orders at EOQ, what will be the average inventory of fuel in his 9,000 gallon tank?

A. ≈1,206 gallons

B. ≈2,578 gallons

C. ≈2,413 gallons

D. ≈2,290 gallons

Answer 1

Answer:

C. ≈2,413 gallons

Explanation:

For computing the average inventory, first we have to determine the economic order quantity which is shown below:

=$\sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

= $\sqrt{\frac{2\times \text{90,000}\times \text{\ 120}}{\text{\ 0.927}}}$

= 4,827.1079 gallons

The carrying cost is

= Price of fuel × holding cost per unit

= $3.09 × 30%

= $0.927

Now the average inventory of fuel is

= Economic order quantity ÷ 2

= 4,827.1079 gallons ÷ 2

= 2,413 gallons