Mercury Corporation Inventory Decision:
Mercury Corporation manufactures running shoes. The factory is open 250 days a year. Mercury currently buys the laces for its shoes from Ti-Rite Company, but is considering manufacturing the laces in-house. Mercury's contract with Ti-Rite specifies a base price per lace of $0.05. Ti-Rite has offered the following quantity discount schedule: (see attached document for schedule)
Annual demand for laces at Mercury is estimated to be 500,000. The cost to place an order with Ti-Rite is $100. The lead time for delivery is 10 working days. If Mercury begins in-house production of laces, it will incur a production cost of $0.0465 per lace. The setup cost for each production run will cost $600. The annual holding cost for each lace is $0.01.
You have been hired as a consultant to analyze the alternatives available to Mercury.
Prepare a report for the management of Mercury Corporation that summarizes your findings. Include the following:
1. Determine the optimal order quantity, reorder point, cycle time, annual holding costs, annual ordering costs, annual purchasing costs, and total annual costs if Mercury purchases the laces for Ti-Rite.
2. Determine the optimal production lot size, length of a production run, cycle time, annual holding costs, annual ordering costs, annual purchasing costs, and total annual costs if Mercury begins producing the laces in-house.
3. Make a recommendation to management as to whether Mercury should begin producing the laces in-house or continue purchasing the laces from Ti-Rite.
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