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Question - SaskAlloy purchases a certain type of catalyst for its forging operations. Demand for this catalyst is estimated to be 5000 kilogram per year, and the cost of purchasing each kilogram of the product is $13.5.
SaskAlloy uses a computerized inventory management system; so, the overhead cost of placing an order is low, and estimated to be $150. However, due to space limitations, SaskAlloy has calculated the rate of holdingone kilogram of the product to be 30% per year.
Due to the importance of the catalyst to the healthy operation of SaskAlloy's production line, cost of shortage is deemed to be quite high and is estimated to be $500 per kilogram.
Required -
1. Calculate the cost of shortage per cycle.
2. Calculate the duration of shortage in each period.
3. Calculate the economic ordering quantity.
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