Reference no: EM13994698

Wintel, Inc. manufactures and sells desktops and notebooks. All components of the computers, with the exception of monitors, are produced in the company. The monitors are purchased from Bay Electronics Co.

The company's annual requirements total 24,000 units, and the price per unit is $60. Wintel does not purchase in greater quantities because Bay Electronics, the supplier, does not offer quantity discounts. There are practically no shortages of monitors because Bay Electronics always meets the delivery schedule. Associated with the purchase of each shipment is the ordering cost of $1000 per order. In addition to ordering cost,  incurs inventory carrying cost that is equal to $300 per unit per year.

Beginning in August of this year, management of Wintel, Inc.  will embark on a company-wide cost control program in an attempt to improve its profits. One of the areas to be closely scrutinized for possible cost savings is inventory planning. One of the alternatives will be to evaluate the effectiveness of the current system of purchasing monitors, improve the current system, and continue purchasing monitors with improved inventory policy. However, over the past few months, the company's production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and management is also considering the alternative of producing monitors inside the company. The production capacity (production rate) for monitors is available at the rate of 800 monitors weekly. It is felt that with a two-week lead time, schedules can be arranged so that the product can be produced whenever needed. All parameters of this production will be constant; shortages will not be allowed; production costs are expected to be $65 per monitor; and setup cost is $750 per set up of equipment for producing monitors.

Questions

1. Identify Wintel's optimal inventory policy of outsourcing monitors from Bay Electronics Co. You need to calculate the optimal order quantity and annual total cost of inventory. Explain your results.
2. In case Wintel starts to produce monitors internally, identify the best inventory policy by calculating the optimal order quantity and annual  total cost of inventory. Explain your results. (Hit: consider that the Wintel operates all 52 weeks a year).
3. Make a recommendation as to whether the company should outsource (purchase) monitors from Bay Electronics Co. or to produce them internally. What is the savings associated with your recommendation as compared with the other option described?