An Air Conditioning Company has an annual demand for 30,000 electronic components, which it purchases from an external supplier at a cost of €10 each. In addition it costs the company €50 to place each order and costs 50% of the cost price to hold each component in stock. What is the Economic Order Quantity (EOQ) and the order cycle time in days if there are 300 working days a year?

b. The company is considering producing the components internally. A feasibility study has indicated that components can be produced internally at a rate of 90,000 per year. The cost of each component under this scheme is €9. Each batch produced will incur set-up costs of €80. What is the maximal inventory and the number of set ups (runs) per year?

c. Use a diagram to show what happens to the maximum inventory if there is an increase in annual production.

d. A competitor company is operating with planned shortages. Does an increase in the cost of shortages lead to a higher or lower EOQ for them?

Answer rating: 100% (QA)

SOLUTION a To calculate the Economic Order Quantity EOQ we can use the following formula EOQ sqrt2DSH where D annual demand 30000 components S setup o... View the full answer