The annual demand for an item that can be either purchased or produced is 3000 units. Costs associated with each alternative are as follows:

Should the item be manufactured or purchased? What is the optimum lot size for the least cost alternative?

Purchase Produced Item cost Purchase cost per 54.00 $15.00 $3.50 purchase Set-up cost per set up Holding cost per item $150 125 $1.25 10,000 per year Production rate per year