The Thomas Lee Press publishes a wide variety of books. One of their steady sellers is Operations Management, now in its fifth edition. Lee expects that the next edition of this book will sell approximately 12,500 copies annually for the next few years. In past years, Lee has always printed and bound a one-year supply of this type of book. Recently, increased inventory costs have forced a reconsideration of this policy. In particular, Lee is considering binding only half the printing quantity at the time of printing, and keeping the remaining printed sheets as unbounded stock. When needed, the remaining half of the lot would be bound. Costs are as follows (omitting typesetting costs, distribution costs, and other costs not affected by this decision):
Printing Binding
Setup cost $5,000 $1,000
Variable cost $4 $2
per unit
Lee charges inventory at 25% per dollar per year.
(a) If a complete printing lot is bound at time of printing, what is the optimal order quantity? What is the annual holding and setup costs?
(b) If only half the printed quantity is bounded, what is the optimal quantity to print? What is the annual holding and setup costs?