Reference no: EM132134994

PeCo sells a single type of mobile phone screen protector. The annual demand for the its screen protectors is 50,000 units and demand seems to be continuous and uniform throughout the year. They currently sub-contract a local manufacturer to produce the screen protector for them at a cost of $3 per unit. The fixed cost associated with each delivery of screen protectors is estimated at $1,200 and careful analysis of quality assurance data has shown that a product held for a whole year in stock has a 0.1 probability of being faulty. This probability is linear with the time spent in stock, i.e., products spending 6 months in the warehouse have a 0.05 probability of being faulty, etc.

The company is also investigating the option of producing the screen protectors in-house. To do so, PeCo would have to lease machines and equipment at a cost of $65,000 per year. Every time a production run is initiated, calibration and cleaning of the production line would need to be performed at a cost of $1,500. The production line produces screen protectors at a constant rate of 60,000 units per year if it is never turned off. The variable cost of production is $1.8 per unit (raw materials and energy consumption). It is assumed that the quality of the screen protectors PeCo produces is identical to that of screen protectors that are produced by the sub-contractor. Hence, the faulty rate of products is identical in both cases (in house production and sub- contracting).

PeCo owns a small warehouse. The storage capacity of the warehouse is 10,000 products. If required, they can lease two additional warehouses, each with the capacity to store 5,000 additional products. One is offered for lease at a cost of $1,000 per year, while the second is fully renovated and offered at $1,500 per year. Assume that throwing out screen protectors (or giving them away for free) is not an option.

Investigate the various production/purchasing options the company should consider.