1 A manufacturer is contemplating a switch from buying to pr

1)         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. Compared to the EOQ, the maximum inventory would be approximately:

a. 30 percent higher.

b. 70 percent higher.

c. 30 percent lower.

d. 70 percent lower.

Solution

1.

D.30 percent lower

Working note:

Economic order quantity (EOQ) = (2DS/H)^.5

Economic production quantity (EPQ) = (2DS/H)^.5 * (P/(P-U)^.5

EPQ = (2DS/H)^.5 * (P/(P-.5P)^.5

EPQ/EOQ = (2)^.5 = 1.414

EOQ = .70EPQ

So, the maximum inventory will be 30% lower.