1. A service station uses 2500 oil filters during the course of a year, and this usage is constant throughout the year. These oil filters are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per oil filter per year is $1.50 (or 10% of the unit cost) and the ordering cost is $18.75. There are 250 working days per year. The station manager wants to re-consider his decision of buying the oil filters and is considering making the oil filters in-house. He has determined that set-up cost would be $25 in machinist time and lost production time. He estimates that the cost (inclusive of materials and labor time) of producing one oil filter would be $14.80, and that holding cost will be 10% of this cost. a) What is the station's optimal production quantity? b) If the station uses the optimal production quantity, what would be the annual total cost of inventory?
1. A service station uses 2500 oil filters during the course of a year, and this usage is constant throughout the year. These oil filters are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per oil filter per year is $1.50 (or 10% of the unit cost) and the ordering cost is $18.75. There are 250 working days per year.
The station manager wants to re-consider his decision of buying the oil filters and is
considering making the oil filters in-house. He has determined that set-up cost
would be $25 in machinist time and lost production time. He estimates that the
cost (inclusive of materials and labor time) of producing one oil filter would be $14.80, and that holding cost will be 10% of this cost.
a) What is the station's optimal production quantity?
b) If the station uses the optimal production quantity, what would be the annual
total cost of inventory?
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