Economic Manufacturing Quantity Assignment

A company is producing a new shipping drone. The company is planning to purchase the required propellers. Here is the data.

• Annual demand is 12,000 drones
• Each drone needs four propellers
• The fixed cost is $250 per order.
• The variable cost is $3.50 per propeller
• The opportunity cost is 12% per dollar-year
• The storage cost is $0.70 per propeller-year.
  1. Determine the economic order quantity (EOQ), rounded to the nearest whole number of propellers.
  2. What is the annual cost of this plan?

An alternate plan is to make the propellers at the plant. Here are some additional data.

• The production rate is 100,000 propellers per year,
• the fixed lot cost is $200 per lot and
• the variable manufacturing cost is $2.60 per propeller.
• Opportunity cost and storage cost are the same.

1. What is the economic manufacturing quantity?
2. What is the annual cost of this plan?