1. A Mankato manufacturing company uses 6000 packing crates a year, which it pur
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Question
1. 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 that this company is also capable of producing same packing crates at its own plant by making additional capital investment of $12,000 for extra machines and equipment. The production rate will be 8000 packing crates per year. Setup costs would be $400 per setup, and unit manufacturing cost would be $9 per crate. Should the company purchase or make? Why? Show all your work. (10 points)Explanation / Answer
Case 1: Purchasing from outside
Demand (D) = 6000
Price = 10
Holding % = 20
Holding cost (H) = Price*Holding % = 10*20% = 2
Ordering cost (S) =60
EOQ = sqrt(2*D*S/H) = sqrt(2*6000*60/2) = 600
Total cost = D/EOQ*S + EOQ/2*H + Price*D = 6000/600*60 + 600/2*2 + 6000*10 = 61200
Case 2: In house Manufacturing
Demand (D) = 6000
Price = 9
Holding % = 20
Holding cost (H) = Price*Holding % = 9*20% = 1.8
Ordering cost (S) = 400
production rate (p) = 8000
usage rate (u) = 6000
EOQ = sqrt(2*D*S/H)*sqrt(p/(p-u)) = sqrt(2*6000*400/1.8)*sqrt(8000/(8000-6000)) = 3266
Total cost = D/EOQ*S + EOQ*H*(p-u)/(2*p) + Price*D + Capital investment = 6000/3266*400 + 3266*1.8*(8000-6000)/(2*8000) + 9*6000 + 12000 = 67,470
As the cost of Case 1 is lower than Case 2, so company should prefer to purchase
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