A tablet computer manufacturer procures memory chips used in its tablet assembly from a special supplier. The supplier offers all unit quantity discounts for the memory chips. The prices and minimum order quantities for the memory chips are listed below.
Price
$18.00 $16.00 $14.00
Minimum Order Quantity
0 2,500 7,500
Assume that the demand for the memory chips is 3,000 units per month. The fixed order processing cost is $500 for each order. The annual inventory holding cost rate is 30%.
a) What is the optimal order size? What is the annual total cost of material, order processing and average inventory holding?
b) Assume that there are 52 weeks annually. If the order lead time for the memory chips is six weeks, determine the reorder point based on the on-hand level of inventory?