A company stocks an item that is consumed at the rate of 50 units per day. K cos

Question

A company stocks an item that is consumed at the rate of 50 units per day. K costs the company $20 each time and order is placed. The holding cost is $0.35 per unit per week. Determine the optimal inventory policy (size of order, reorder point, and effective lead time), assuming a one week lead time. Also determine the optimal number of orders per year (based on 365 days per year). A company can choose to produce an item itself or to buy it from a supplier. If it is produced in house, it will cost $20 each time the machines are set up. The production rate is 100 units per day. If it is bought from the supplier, it will cost $15 each time an order is placed. The cost of maintaining the item in stock, whether produced or purchased, is $0.02 per unit per day. The company's usage of the item is approximately 26,000 units annually. Assuming that no shortage is allowed, what is the cost per unit per day for producing and for purchasing? Should the company produce the items itself or should they purchase from the supplier?

Explanation / Answer

Reorder Point= daily demand X lead time = (50 units/day X 7 days/1 week) X 1 week =350 units

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