Economic Order Quantity Formula
The annual demand for a certain item made-to- stock = 15,000 pc/yr. One unit of the item costs $20.00, and the holding cost rate = 18%/yr. Setup time to produce a batch = 5 hr. The cost of equipment downtime plus labor = $150/hr. Determine the economic batch quantity and the total inventory cost for this case.

Question

Accepted Answer

Setup cost [latex]C_{su} = 5 × \$150 = \$750[/latex]. Holding cost per unit = 0.18 × $20.00 = $3.60. Using these values and the annual demand rate in the EOQ formula,

[latex]EOQ = \sqrt{\frac{2(15,000)(750)}{3.60} } = 2,500[/latex] units

Total inventory cost is given by the TIC equation:
TIC = 0.5 (3.60) (2,500) + 750 (15,000/2,500) = $9,000

Including the actual production costs in the annual total, Equation (25.4),

[latex]TC = D_{a} C_{pc} + \frac{C_{h} Q}{2} + \frac{C_{su}D_{a}}{Q}[/latex]

[latex]TC = 15,000 (20) + 9,000 = \$309,000[/latex]

Question 25.3: Economic Order Quantity Formula The annual demand for a cert...

Related Answered Questions

Verified Answer:

MRP Time-Phased Quantity Requirements To illustrate these various complicating factors, consider the MRP procedure for component C4, which is used in product P1. This part also happens to be used on product P2 of the master schedule in Figure 25.2. The product structure for P2 is shown in ...

Verified Answer:

MRP Gross Quantity Computations In the master schedule of Figure 25.2, 50 units of product P1 are to be completed in week 8. Explode this product requirement into the corresponding number of subassemblies and components required. ...

Verified Answer: