Reference no: EM133014453

The below question is about economic order quantity and finite replacement model.

Kindly help me to understand as I am not able to get it correct.

Question 1:

An Oximeter manufacturer purchases the displays used in the Oximeter from an overseas supplier. The supplier charges $12 per display and there is an ordering cost of $100 every time an order is placed to the supplier. The items take 3 weeks to arrive after the order is placed. The company is considering whether to make the displays in-house because of the uncertainties in shipment from overseas. The in-house production process for the displays is continuous, occurs at a finite rate and is non-stop throughout the year. Other information about the display production process is shown below

Display Production Process Annual Demand 73,000 units 

Unit Cost $10 Setup

Cost $85 per batch 

Machine Purchase Cost $5000 

Holding cost (13+X) *0.1 percent 

Daily Production Rate 1,000 units 

Production Set-up time 15 days Where X is the last digit of your PI number. If your PI number is B1234567, X = 7. 

(a) Determine the best order quantity the company should order from the supplier to minimise the annual inventory cost. What is the annual inventory cost if the company decides to purchase that quantity from the supplier? How would the company manage its inventory so that they don't run out of stocks? 

(b) If the company decides to make the displays in-house, solve for the optimal batch size. What is the optimal inventory cost? What is the number of days required to produce a batch of display units? What would be the ROL? State any assumptions made.