Machines 'R Us purchases a subcomponent critical for its most popular product from another manufacturer. The annual demand for the subcomponent is 4,000 units. The holding cost is assessed at 20% of the price of the subcomponent. The manufacturer of the subcomponent charges MRU $30 for each unit if MRU orders less than 200 units and $28 for each unit if MRU orders 200 units or more. MRU’s cost to place an order is $18.
a. What is the optimal order quantity for this subcomponent if the EOQ model is used?
b. What is the total of annual relevant costs of Machines 'R Us (considering the cost of inventory holding and cost of ordering)?
c. If the EOQ model is used, what is the optimal number of orders to be placed in a year?
d. If the manufacturer’s lead time is 1 week and MRU operates 50 weeks a year, what is the reorder point for the product?
e. What is your interpretation of the reorder point you calculated in part (d)?