Consider a company which has purchased products from its supplier and sold them to customers. Last year, the demand for a product was constant at 20 units per month. The company paid $25 to process an order and arrange delivery. The unit cost was $100 per unit and the annual holding cost was 30% of the unit cost.
This year, the company is considering to manufacture products by itself. With a production rate of 40 units per month, each unit costs $75 and batch setup costs are $1000. It is expected to have same demand rate (20 units per month). Also, the annual holding cost is set to 35% of the unit cost.
a) Would it be better for the company to produce the item itself rather than purchase it?
b) What are the best order policy (order quantity) and the resulting total cost?