A food processing company produces frozen meals for the retail sector. The meals are packaged in special containers, which are currently purchased from an outside supplier. The company at present has an annual demand for 50,000 of these containers and each costs €1. It also costs €20 in administration and delivery costs to place an order with an outside supplier. The company has recently taken over a small manufacturing company, which is capable of producing the containers at the rate of 100,000 per year. The containers will costs €0.95 each to produce and set up costs will be €50 per batch. The annual storage cost per container is 30% of its price.

(i) Determine the EOQ if the company purchases the containers from the outside supplier.

(ii) The supplier has introduced a discount scheme whereby customers purchasing batches of more than 4,000 items will be given a discount. The scheme will offer a 0.5% discount on the price per item for every 2,000 items above this limit i.e. ordering batches of between 4,000 and 6,000 will result in 0.5% discount, batch size in range 6,000 – 8,000 a discount of 1%, etc. up to a maximum batch size of 10,000. Should the company take advantage of this by changing the EOQ calculated above? Give reasons for your answer.

(iii) The company is considering using containers manufactured by its new acquisition. Determine the optimum batch size it should produce and calculate the inventory costs associated with this. Should the company continue with the outside supplier or produce the container internally?

Answer rating: 100% (QA)

SOLUTION i The Economic Order Quantity EOQ can be calculated using the formula EOQ sqrt2DSH where D annual demand 50000 containers S order cost 20 per order H holding cost per unit 30 of 1 030 per uni... View the full answer