Question 6: The estimated annual demand for a year consisting of 300 workdays is 81,000 units for a company. The item is purchased from an outside vendor for $22 per unit and the ordering cost is $5 per order. The inventory holding cost is estimated to be 30% for this company. A proposal has been made to produce this item internally. The cost of production will be $20 per unit and the set up cost will be $2500. The production rate will be 500 units per day. Compare the two alternatives in terms of total costs, and average inventory. What will be your recommendation? Why?

Current Scenario Input Data:

________________________ _______________________ ___________________

________________________ _______________________ ___________________

Current Scenario Results:

EOQ = __________________ Average Inventory = ___________________

Cycle Time = ____________________ # of Orders/year = ______________________

Annual Holding Cost = _________________ Annual Ordering Cost = _________________

Annual Item Cost = ____________________ Annual Total Cost = _____________________

New Proposal Input Data:

________________________ _______________________ ___________________

________________________ _______________________ ___________________

_________________________ ________________________ ___________________

New Proposal Results:

EOQ = __________________ Average Inventory = ___________________

Cycle Time = _________________ # of Runs/year = _____________________

Annual Holding Cost = _________________ Annual Ordering Cost = _________________

Annual Item Cost = ____________________ Annual Total Cost = _____________________

Conclusion: Should we accept the proposal to produce internally? ________________

How much do we gain or lose by accepting it? ______________