The demand for a product is constant at 20 units a month. Each unit costs 100 TL. Last year the cost of running the company’s purchasing department (which sent out 2,000 orders) was 50,000 TL. Annual holding costs are 20% of unit cost for capital, 5% for storage space, 3% for deterioration and obsolescence and 2% for insurance. All other costs associated with stocking the item are combined into a fixed annual cost of 2,400 TL.
a) Calculate the economic order quantity for the item, the time between orders and the corresponding total cost.
b) By making the item itself the company could avoid the fixed cost of 2,400 TL a year. With a production rate of 40 units a month, each unit costs 75 TL and batch set-up costs are 1,000 TL. Would it be better for the company to make the item rather than buy it?