Sam buys fuel for his construction vehicles from the local distributer. He uses 8,500 gallons a month. The local distributor charges him $20.50 per order when he orders and it costs him $9.00 per gallon per year to store the gas at his farm. The distributer can arrive within an hour of his order and we have a 500 gallon tank he can fill. From a logical and reasonable standpoint, how much fuel should Sam order when he calls the distributer? (Remember how big the tank for his gas is)

He should order 681.66 gallons to minimize the cost, but he have a 500 gallon tank he can fill, so he will order 500 gallons every time, to minimize the cost.

Explanation:

According to the given data we have the following:

h = handling cost per unit = $ 9

S = Ordering cost per order = $20.5

He uses 8,500 gallons a month, therefore, the annual demand D= 8,500*12 = 102,000 gallons .

Therefore, the optimal ordering quantity would be= [ (2*D*S) / h ]1/2

                                                                                   =681.66 units

He should order 681.66 gallons to minimize the cost, but he have a 500 gallon tank he can fill, so he will order 500 gallons every time, to minimize the cost.

drop shippers;