A company has purchased one component from its supplier for years. Since the production process of this component is quite simple and involves no capital investment, the Operations Manager proposes to make this component in house so that the component may flow gradually into the assembly line for use. The following data are also given for your comparison and decision making: To buy To make Annual demand 30,000 units 30,000 units Cost per unit $9 $10 Fixed cost $45 per order $72 per batch Holding cost (per unit per year) $2.7 $3.0 Weekly demand 600 units 600 units Weekly production N/A 800 units Lead time 5 days N/A Operates 50 weeks a year
Suppose the company decides to make the component in house. In which of the following scenarios will EPQ decrease? The cost per unit decreases from $10 to $9 The fixed cost increases from $72 to $80 The annual demand increases from 30,000 units to 60,000 units The weekly production rate increases from 800 to 1000
If the company decides to make the component in house, which of the following is not true? If the fixed cost increases by a factor of 4, EPQ will increase by a factor of 2 If the annual demand increases by a factor of 4, the average inventory will increase by a factor of 2 If both the weekly demand rate and the weekly production rate increase by a factor of 4, EPQ will increase by a factor of 2 If the fixed cost increases by a factor of 4, the total annual stocking cost (i.e., ordering cost and holding cost) will increase by a factor of 2
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