Question: A purchasing agent for a particular type of silicon wafer used in the production of semiconductors must decide among three sources. Source A will sell the silicon wafers for $2.50 per wafer, independently of the number of wafers ordered. Source B will sell the wafers for $2.40 each but will not consider an order for fewer than 3,000 wafers, and Source C will sell the wafers for $2.30 each but will not accept an order for fewer than 4,000 wafers. Assume an order setup cost of $100 and an annual requirement of 20,000 wafers. Assume a 20 percent annual interest rate for holding cost calculations.
a. Which source should be used, and what is the size of the standing order?
b. What is the optimal value of the holding and setup costs for wafers when the optimal source is used?
c. If the replenishment lead time for wafers is three months, determine the reorder point based on the on-hand level of inventory of wafers.