A new part X is required at a daily rate of 125 units. An outside suppler is ready to supply this part at a unit cost of $4.60. The cost of placing an order is $160 and the inventory holding cost has been calculated as $0.0025 per day per unit.
The production supervisor suggests that the part could be manufactured internally on the machine Y, even though there are five other products currently made on the machine. The demand rates for the five products mentioned above are 160, 220, 280, 175 and 240 units per day. The production capacities of Y for the above five products are 720, 1000, 1600, 1400 and 1400 units per day.
Trial runs carried out showed that part X could be made on Y at a daily production rate of 1200 units at a unit cost of $4.50. The set up cost would be $750 and the part would be available as soon as it is made.
The objective of the company is to minimize the total cost per year of getting the part X.
You are required to determine
a) The Economic Order Quantity and the associated cost per year.
b) Determine whether there is enough capacity on Y to produce the product X on a regular basis.
c) Determine the Economic Batch quantity and the associated annual cost.
d) As a production manager give your recommendation with reasons.