Inventory costs: (a) Determine the optimal order quantity, the time between orders and the annual inventory cost. (b) Determine the difference in annual inventory costs between the optimal policy and the current policy of placing two orders every month.

A company assembles motherboards which contain the Enterprise chip. The company uses 9,000 Enterprise chips each year. The supplier of the chips imposes a £5 delivery charge on each order. The chips have to be stored in a freezer resulting in a high holding cost which has been estimated at £0.48 each per month.
(a) Determine the optimal order quantity, the time between orders and the annual inventory cost.
(b) Determine the difference in annual inventory costs between the optimal policy and the current policy of placing two orders every month.
(c) The purchase cost of the Enterprise chip is usually £10 each. However, a new chip is due to be announced shortly and so a discount on the Enterprise is being offered. On orders of over 150, the price is reduced to £8. Another supplier of the Enterprise chip has been found who is selling the chip for £9 but with no discount for large orders.
Which supplier should be used and what is the annual inventory cost for that supplier?

Attached file(s):

ORa.doc  View File