A mankato manufacturing company uses 6000 packing crates a year, which it purcha
ID: 431384 • Letter: A
Question
A mankato manufacturing company uses 6000 packing crates a year, which it purchases at a cost of $10 each from a supplier in Texas. An annual carrying (holding) cost is estimated to be 20 percent of the price per crate. Ordering cost is $60 per order.
Suppose this company is also capable of producing the same packing crates at its own plant by making additional capital investment $12,000 for extra machines and equipment. The production rate will be 8000 crates per year. Setup costs would be $400 per setup, and unit manufacturing cost would be $9 per crate. Should the company puchase or make? Why? Show all your work.
Explanation / Answer
Following are the relevant details for determining Economic Order quantity ( EOQ ) at which sum of annual ordering plus inventory holding cost is minimized :
Annual demand = D = 6000 crates
Annual unit holding cost = Ch = 20% of $10 = $2
Ordering cost = Co = $60
Therefore,
Economic order quantity ( EOQ )
= Square root ( 2 x Co x D/ Ch )
= Square root ( 2 x 60 x 6000/ 2)
= 600
Annual ordering cost = Co x D/ EOQ = $ 60 x 6000/ 600 = $600
Annual inventory holding cost = Ch x EOQ/2 = $2 x 600/2 = $600
Total annual inventory related cost = $600 + $600 = $1200
Following are the relevant details for determining Economic production Quantity ( EPQ) which will minimize sum of annual set up cost plus annual inventory holding cost :
Annual demand = D = 6000 crates
Set up cost = Cs = $400
Annual unit inventory holding cost = Ch = 20% of $9 per crate = $1.8
Economic Production quantity ( EPQ )
= Square root ( 2 x Cs x D/Ch)
= Square root ( 2 x 400 x 6000/1.8)
= 1632.99 ( 1633 rounded to nearest whole number )
Annual set up cost = Cs x D/EPQ = $400 X 6000/1633 = $1469.68
Annual inventory holding cost
= Ch x EPQ/ 2 x ( 1 – Demand per year/ Production rate per year)
= $1.8 x 1633/2 x ( 1 – 6000/8000)
= $1.8 x 816.5 x 0.25
= $367.42
Annual inventory related cost = $1469.68 + $367.42 = $1837.1
Since total annual inventory related cost ( $1200) in case of ordering < Total annual inventory related cost in case of producing ( $1837.1) , the company should purchase instead of making
ANSWER : THE COMPANY SHOULD PURCHASE INSTEAD OF MAKING
ANSWER : THE COMPANY SHOULD PURCHASE INSTEAD OF MAKING
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.