If the Bike Company decides to produce the handlebars, what is the optimal order quantity? What is the annual cost?
A Bike Company has a line of specialty mountain bikes which
require 5,000 handlebars annually. The handlebars can be purchased
from a supplier for $30 per unit, or they can be produced
internally. The internal production cost is $20 per unit, and the
production rate is 20,000 units per year. The cost to set up
production is $5000. It costs $25 to issue a purchase order to buy
handlebars from the supplier. Inventory holding cost is 25% per
year. If the Bike Company decides to produce the handlebars, what
is the optimal order quantity? What is the annual cost?
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