Optimal Order Quantity for Metropolitan Bus Company

What is the optimal order quantity for the Metropolitan Bus Company (MBC) to minimize costs?

a) 5000

b) 1

c) MBC should not consider the capacity of its storage tanks as the maximum inventory is only 5000

d) 6250

Answer:

The optimal order quantity for MBC to minimize costs is 18000 gallons of diesel fuel.

In this case, the optimal order quantity refers to the amount of inventory that MBC should have on hand at any one time to be most cost-effective. By ordering 18000 gallons of fuel, MBC can balance the cost of ordering and holding inventory, optimizing their operational efficiency.

Given the yearly fuel usage of 180,000 gallons, the lead time for a new shipment of 10 days, and the cost of holding inventory at $0.24 per gallon per year, MBC can benefit from ordering 18000 gallons at a time.

By maintaining an average inventory of 9000 gallons and ordering 10 times a year, MBC can fulfill demand without tying up excess working capital. This optimal quantity ensures that MBC meets demand requirements while keeping costs in check.

Optimal order quantity is a critical concept for inventory management, helping companies like MBC make informed decisions about when and how much to order to optimize their supply chain operations.