A manufacturing company needs 2500 units of a particular component every year. The company buys it at the rate of Rs. 30 per unit. The order processing cost for this part is estimated at Rs. 15 and the cost of carrying a part in stock comes to about Rs. 4 per year.
The company can manufacture this part internally. In that case it saves 20 percent of the price of the product. However it estimates a set up cost of Rs. 250 per production run. The annual production rate would be 4800 units. However the inventory holding costs remain unchanged.
Solution :
1. With D , = 2500 units A = Rs. 15 order and h = Rs. 4 unit year we have
EOQ = 2AD / H = √(2x 15x 2500)/ 4 = 137
Optimal number of orders = D / EOQ = 2500 / 137 = 18
2. Given D= 2 500 units S= 2500 setup h = Rs. 4 unit year P = 4,800 units d= 2500 units we get
2x 2500x 250x/ 4 4800 / 4800 - 2500 = 808 units
Average duration of the production run = 808 / 2500 = 0.32 years
3. When item is purchased form outside :
Total cost = Dc + D / EOQ x A + EOQ / 2 X H
= 2500x 30x+x2500/ 137 X 15 + 137 / 2 X4
Rs. 75, 548
When item is produced internally :
Cost per unit = 80 % of Rs. 30 = Rs. 24
Set up cost S = Rs. 250 per set up
Total cost = Dc + D/ ELS X S + ELS / 2 S p -d / p X h
= 2500x 24 + 2500 /808X 2500+ 808 /2 X 2300/ 4800X
= Rs. 61,548
Evidently the company should manufacture the product internally.