IMET Manufacturing Co. produces a product with a constant demand rate of 12,000 units per year. The machine used to manufacture this item has a production rate of 60,000 units per year, therefore the product will be produced in batches rather than continuously. Because the units are produced sequentially, the rate of addition to inventory is finite. The machine setup cost is $400 and the unit variable production cost is $40. No shortages are to be allowed.
a) If the annual inventory carrying-cost rate is 25%, what is the economic manufacturing lot size? What is the maximum on-hand inventory?
b) What are the production uptime and downtime?
c) If the manufacturing uses a lot size of 4000, what is the total relevant cost including setup and inventory holding costs?
A major component is required to manufacture this product, and it is purchased from an external supplier. It costs IMET $60 to place an order. The bill of materials shows that two units of this component are required to make one unit of the product. The annual holding cost rate is 25%. The supplier of this component for IMET recently offers the following discount structure on purchases of the component:
Order Quantity 0 < Q < 2,000 2,000 < Q < 4,000 4,000 < Q < 6,000 6,000 < Q < 8,000 8,000 < Q < 10,000 10,000 < Q
Price $10.00 $9.75 $9.50 $9.00 $8.50 $8.00
Determine an optimum order quantity to use for the company to minimize total costs assuming the following discount types:
d) The type of discount is all-unit.
e) The type of discount is incremental.