The Special Chemical Company uses 150,000 gallons of acid per month. The cost of carrying the chemical in inventory is P30 per gallon per year, and the cost of ordering the chemical is P7,500 per order. The firm uses the chemical at a constant rate throughout the year. It takes 21 days to receive an order once it is placed. The recorder point is

a)105,000 gallons

b)7,500 gallons

c) 90,000 gallons

d)30,000 gallons.

The reorder point is 105,000 gallons which means when the company has stock of 105,000 gallons at that time it should place the order.

The correct answer is option (a).

Step-by-step explanation

Compute the reordering point as follows: -

Reorder Point = {Daily Consumption x Time for Receiving Inventory} + Safety Stock

={(Monthly Consumption/Number of Days in a Month) x Time for Receiving Inventory} + Safety Stock

= {(150,000 gallons / 30 Days) x 21 days} + 0

= 105,000 gallons

Reorder Point is 105,000 gallons.

Explanation: Daily consumption has been computed by dividing the monthly consumption by 30 as it has been assumed that there are 30 days in a month. Daily consumption has been multiplied with the time for receiving inventory to find the reorder point.

Note: In absence of any information the safety stock has been assumed to be 0 gallons.