Question

Josh, Inc. is faced with the choice of either producing a newly designed product, XX-30, to stock in anticipation of demand or to customer order. The demand for the product is expected to be 5,000 units per week. Josh decided to produce XX-30 in lots of 500 units. The cost of holding the average unit in inventory per year is $50 times the average inventory level. If Josh, Inc. produces to order, it must discount its unit price on all sales $5 for each week that the first customer to order has to wait before the product is delivered. Should Josh, Inc. produce to stock or to order?

Answer 1

Step-by-step explanation:

1. Make to stock

Average inventory = Order quantity/2 = 500/2 = 250

Inventory holding cost = average inventory multiplied by unit holding rate = 250 *5 = 1250

2. Make to order

Discount = 5000*5 = 25000

It is better to stock and produce because costs are low