A manufacturer is contemplating a switch from buying to producing a certain item

ID: 361642 • Letter: A

Question

A manufacturer is contemplating a switch from buying to producing a certain item. Setup cost would be the same as ordering cost. The production rate would be about double the usage rate. (Can you please show me how you did it)

1) Compared to the EOQ, the economic run size would be

A) the same

B) approx 20% larger

C) approx 40% larger

D) 20% smaller

E) approx 40% smaller

2. Compared to the EOQ, the miximum inventory would be

A) approx 70% higher

B) approx 30% higher

C) the same

D) approx 30% lower

E) approx 70% lower

Explanation / Answer

EOQ = (2*Co*D/Cc)

EPQ= (2*Co*D/(Cc*(1-x)))

x=D/P

D = demand rate

P =production rate

Co=ordering cost

Cc=holding cost

1) The production rate would be about double the usage rate.

hence, P = 2D

x=D/2D=0.5

EPQ= (2*Co*D/((1-0.5)*Cc))

EPQ= (2*Co*D/0.5Cc)

EPQ= (1/0.5)*EOQ

EPQ= (2)*EOQ

EPQ=1.41*EOQ

Hence, EPQ is around 40% larger than EOQ.

Ans.: c) EPQ will be approximately 40% larger than the EOQ.

2) Compared to the EOQ, the maximum inventory would be

maximum inventory = Q

EPQ = 1.41 EOQ

EPQ = 1.41*Q

Q=EPQ/1.41

Q=0.71 EPQ

Hence, compared to EOQ, maximum inventory in EPQ is only 70% of that in EOQ model.

Ans.: D) compared to the EOQ, the maximum inventory would be approx 30% lower.