The XYZ Company purchases a component used in the manufacture of automobile generators directly from the supplier. XYZ’s generator production, which is operated at a constant rate, will require 1,200 components per month throughout the year.

Assume ordering costs are $25 per order, item cost is $2.00 per component, and annual inventoryholding costs are charged at 20 percent. The company operates 250 days per year, and the lead time is five days.

a. Compute the EOQ, total annual inventoryholding and ordering costs, and the reorder point.

b. Suppose XYZ’s managers like the operational efficiency of ordering in quantities of 1,200 items and ordering once each month. How much more expensive would this policy be than your EOQ recommendation? Would you recommend in favor of the 1,200-item order quantity? Explain. What would the reorder point be if the 1,200-item quantity were acceptable?