Inventory

Scott’s Vacuum Cleaner Manufacturing Company produces 24,000 vacuum cleaners per year. One component part is required that is currently manufactured at one of its own facilities. It costs the company $10 per component, plus $20 to initiate a production order. They estimate that they have capacity to produce up to 40,000 components per year. Assume that holding costs are based on 24% annual interest.

Suppose that a supplier has offered to supply the items at the same costs ($10/component with a $20 order cost). Suppose that an EOQ model will be used to resupply the item.

What explains the differences between the EPQ and EOQ options? Be specific.