solution

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 $2.5 per wafer, independently of the number of wafers ordered. Source B will sell the wafers for $2.4 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. (These conditions are summarized in the table below.)

Assume a reorder cost of $100 and an annual requirement of 20,000 wafers. Assume a 20 percent annual interest rate for holding cost calculations.

Table 1. Quantity discount in unit cost

SOURCE	UNIT COST	ORDER QUANTITY RANGE
A	$2.5	No restriction
B	$2.4	3000 <= Q
C	$2.3	4000 <= Q

(a) Which source should be used, and what is the best order quantity of the selected source that minimizes the total cost?

(b) If the replenishment lead time for wafers is 3 months, determine the reorder level (ROL) based on the on-hand level of inventory of wafers. Use the best Q in the question (a).