A manufacturing  company  needs  2500 units  of a particular component every  year. The  company buys  it at the rate of Rs. 30 per  unit.  The order processing cost for this part is estimated at  Rs. 15  and the cost  of carrying  a part in stock  comes  to about Rs.  4 per year.

The company can manufacture this  part internally. In   that case  it saves 20  percent  of the price of the  product. However  it estimates a set up cost  of Rs. 250   per production  run.  The annual production  rate would  be 4800 units. However  the inventory  holding costs  remain unchanged.

 Solution :

1. With  D , = 2500 units  A = Rs.  15  order and h = Rs. 4  unit year we have

                         EOQ = 2AD / H = √(2x 15x 2500)/ 4 = 137

                          Optimal number  of orders = D / EOQ = 2500 / 137 = 18

2. Given  D= 2 500 units S= 2500 setup h = Rs. 4 unit year  P = 4,800 units d=  2500 units  we get

  2x 2500x 250x/ 4       4800 / 4800 - 2500 = 808 units

Average duration of the  production run = 808 / 2500 = 0.32 years

3. When item is  purchased form  outside :

Total cost = Dc +  D / EOQ x A + EOQ / 2 X H

 = 2500x 30x+x2500/ 137 X 15 + 137 / 2 X4

 Rs.  75, 548

When item is produced internally :

 Cost  per unit   = 80 % of Rs. 30  = Rs. 24

Set  up cost    S =  Rs. 250  per set  up

 Total  cost  = Dc  + D/ ELS  X S + ELS / 2 S p -d / p X h

= 2500x 24 + 2500 /808X 2500+ 808 /2 X 2300/ 4800X

 = Rs. 61,548

  Evidently  the company  should  manufacture  the product internally.