Response to the following problem:
Microvision currently purchases a particular computer chip from IMTEL for $12.42 each, for use in its PC computers. Microvision's annual demand for the chip is estimated at 140,000 units, and it has a safety stock requirement of 600 chips. Because of high security expense, the cost to place an order with IMTEL is estimated at $1300 and lead time is 20 working days. The company operates 310 days per year. Instead of purchasing from IMTEL, Microvision can sign a licensing agreement to manufacture the chips itself. The licensing agreement will cost Microvision $5000 per year. If Microvision signs the agreement, it estimates it can produce the chips on its own assembly line at a cost of $11.60 per chip (not including the licensing or inventory costs). $etup time will take two days. The production setup cost for making these chips is $15,000, and the production line is capable of manufacturing 2000 chips a day, 310 days a year. If the company produces the chips in-house, it will no longer require any safety stock. Microvision uses a 24% annual holding cost rate.
a. What are the optimal order quantity, reorder point, number of days between orders (cycle time), and total annual inventory cost (holding, ordering, safety stock, and procurement) if Microvision purchases the chips from IMTEL?
b. What are the optimal batch size, length of a production run in days (including production setup time), number of days between the start of successive production runs, and total annual inventory cost (holding, setup, licensing, and production) if Microvision begins producing the chips in-house?
c. What is your recommendation to management as to whether Micrivision should begin in-house production of the chips? Justify this recommendation.