The oar maker Collars produces high-quality oars shipped all over the world. The oars are equipped with bronze oarlocks when sold to customers. Those oarlocks are purchased from an external supplier. To simplify the administrative process and at the same time to ensure that they not running out of oarlocks, Collars decides to use a two-bin system for controlling oarlock inventory, that is, they keep two boxes of oarlocks, and when one box is empty, they order a new one from the supplier.
The supplier tells Collars that they can deliver any quantities and that the lead-time will be 10 working days. They also offer Collars a fixed price of $200 for the freight regardless of order quantities.
In order to secure a high quality, Collars’s management tests 5 oarlocks per shipment, and this process takes 60 minutes for one person to perform.
Collars sells 5,000 oars per year and the plant is open 250 days per year. The value of a pair of oarlocks is $50 and the cost of a working hour is $20. The annual holding cost is set to 15% of the item’s value.
a) Calculate the most economical quantity to order.
b) What would be the minimum quantity allowed to be ordered?