Answer to Question #79188 in Economics for Esther

Question

A manufacturing company needs 2500 units of a particular component every year. The company buys it at the rate of Sh. 30 per unit. The order processing cost for this part is estimated at Sh. 15 and the cost of carrying a part in stock comes to about Sh.4 per year. The company can manufacture this part internally. In that case, it saves 20% of the price of the product. However, it estimates a set-up cost of Sh. 250 per production run. The annual production rate would be 4800 units. However, the inventory holding costs remain unchanged.
i. Determine the EOQ and the optimal number of orders placed in a year. (3 marks)
ii. Determine the optimum production lot size and the average duration of the production run. (4 marks)
iii. Should the company manufacture the component internally or continue to purchase it from the supplier?