The Happy Postage Company sells pre-stamped envelopes. The demand for pre-stamped envelopes is always 60 a day, and there are 200 working days at the Happy Postage Company. It costs the Happy Postage Company $100.00 to set-up the production process each time it wants to make a batch of pre-stamped envelopes. The Happy Postage Company can produce 150 pre-stamped envelopes in a working day, and it costs the company $0.80 to keep one pre-stamped envelope in inventory for one year. The Happy Postage Company also does all of its inventory planning according the “Economic Production Quantity” formula. Please answer the following three questions, based on this information.
1. How many pre-stamped envelopes does the Happy Postage Company produce each time it sets up to produce pre-stamped envelopes? (Round to the nearest whole number.)
2. What is the total annual cost of the Happy Postage Company’s inventory policy for pre-stamped envelopes?
3. How many times a year does the Happy Postage Company produce pre-stamped envelopes?
Problem 2
Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? Assume ordering cost is $80/order.