Order cost=70 Unit cost=25 Holding cost =, 2 x 25 =5 Part B- Make or Buy? Over t

Question

Order cost=70
Unit cost=25
Holding cost =, 2 x 25 =5

Part B- Make or Buy? Over the past few months, the company's production capacity has been expanded. As a result, excess capacity is now available in the Production Department, and the company is considering producing the screens in their own plant, rather than purchasing from external suppliers. The available capacity allows for production of the screens at the rate of 1000 units per month. The production costs are expected to be OMR 27 per unit. The setup for a production run requires a full 8-hour shift, with a cost for labor and lost production time of OMR 50 per shift hour 15. What is the optimal order quantity if the company manufactures the screens in its Production Department? 16. How many production runs will be done every year? 17. What is the duration of each production run? 18. What is the maximum inventory? 19, What is the total annual cost of the “Make" policy? 20. Should the Nawras company "Make" or "Buy" the laptop screens? Justify your answer

Explanation / Answer

Make Policy

Annual demand, D =3000

Manufacturing cost, C = 27

Holding cost, H =0.2 x 27 = 5.4

Annual Production, P = 12*1000 units per month = 12000 units per year

Setup cost, S = 8 hour * 50 per hour = 400

15) Optimal production quantity as per EPQ model, Q = (2DS/(H*(1-D/P)))

= (2*3000*400/(5.4*(1-3000/12000)))

= 770

16) Production runs per year, N = D/Q = 3000/770 = 3.9

17) Duration of each production run = 770/1000 = 0.77 month

18) Maximum inventory, V = Q*(1-D/P) = 770*(1-3000/12000) = 578

19) Total cost Make Policy = N*S + (V/2)*H + D*C = 3.9*400 + (578/2)*5.4 + 3000*27 = 84,120

20)

Buy policy

Unit cost, C =25

Holding cost, H =0.2 x 25 = 5

Order cost, S =70

Q = (2DS/H) = (2*3000*70/5) = 290

Total cost of Buy policy = (D/Q)*S + (Q/2)*H + D*C = (3000/290)*70 + (290/2)*5 + 3000*25 = 76,449

Total cost of Buy policy is lesser than that of Make policy. Therefore, company should Buy

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