Question

A local machine shop buys hex nuts and molly screws from the same supplier. The hex nuts cost 20 cents each and the molly screws cost 40 cents each. A setup cost of $150 is assumed for all orders. This includes the cost of tracking and receiving the orders. Holding costs are based on a 15 percent annual interest rate. The shop uses an average of 15,000 hex nuts and 12,000 molly screws annually.

a. Determine the optimal size of the orders of hex nuts and molly screws, and the optimal time between placements of orders of these two items.

b. If both items are ordered and received simultaneously, the setup cost of $100 applies to the combined order. Compare the average annual cost of holding and setup if these items are ordered separately; if they are both ordered when the hex nuts would normally be ordered; and if they are both ordered when the molly screws would normally be ordered

Answer 1