Question

* Q90: A company is considering the possibility of purchasing from a supplier a component it now
makes. The supplier will provide the components in the necessary quantities at a unit price of ₹9.
Transportation and storage costs would be negligible,
The company produces the components from a single raw material in economic lots of 2,000 units at a
cost of ₹2 per unit. Average annual demand is 20,000 units. Input-output ratio is 100%. The annual
holding cost is ₹0.25 per unit and the minimum stock level is set at 400 units. Direct labour costs for
the component are ₹6 per unit; fixed manufacturing overhead is allocated at a rate of ₹3 per unit based
on a normal activity of 20,000 units. The company also hires the machine on which the components are
produced at the rate of ₹200 per month. Should the company make the components?​

Answer 1

Q90 a try again in 28 seconds

Answer 2

Answer:

EOQ = √(2*20,000*O)÷ 0.25

let ordering cost be O

2000 = √ 40000O÷ 0.25

squaring both sides

(2000)^2 = 1,60,000O

O = (2000)^2 ÷ (400)^2

O = 25

Average stock level = Minimum stock level + 1/2EOQ

= 400 + 1/2 × 2000

= 1400 units

now comparison is made between the cost of making the components and cost of purchasing

Make = storage cost +ordering cost+ material cost+ labour cost+ rental charges

= 1400×0.25 + 20000×25/2000 + 20000×2+ 20000×6 +200× 12

= 1,63,000

Buy= 20000×9

= 1,80,000

since the making cost is less than buying cost the company should make the component till it has some alternative use for existing capacity.