Inventory Holding Cost for WIP During Manufacturing The cost of the raw material for a certain part is $100. The part is processed through 20 processing steps in the plant, and the manufacturing lead time is 15 wk. The production time per processing step is 0.8 hr, and the machine and labor rate is

Question

Inventory Holding Cost for WIP During Manufacturing
The cost of the raw material for a certain part is $100. The part is processed through 20 processing steps in the plant, and the manufacturing lead time is 15 wk. The production time per processing step is 0.8 hr, and the machine and labor rate is $25.00/hr. Inspection, material handling, and other related costs average to $10 per processing step by the time the part is finished. The interest rate used by the company i = 20%, and the storage rate s = 13%. Determine the cost per part and the holding cost.

Accepted Answer

The material cost, operation costs, and nonoperation costs are by Eq. (25.6),

[latex]C_{pc} = C_{m} + n_{o}(C_{o} T_{p} + C_{no} )[/latex]

[latex]C_{pc} = \$100 + 20(\$25.00/hr * .8 hr + \$10) = \$700/pc[/latex]

To compute the holding cost, first calculate [latex]C_{p}[/latex]:
[latex]C_{p} = 20(\$25.00/hr * .8 hr + \$10) = \$600/pc[/latex]

Next, determine the holding cost rate h = 20% + 13% = 33%. Expressing this as a weekly rate h = (33%)/(52 wk) = 0.6346%/wk = 0.006346/wk. According to Eq. (25.10),

Holding cost / pc [latex]= (C_{m} + \frac{C_{p}}{2}) h (MLT)[/latex]

Holding cost/pc [latex]= (100 + 600/2)(.006346)(15 wk) = \$38.08/pc[/latex]

[latex]TC_{pc} = 700.00 + 38.08 = \$738.08/pc[/latex]

Question 25.4: Inventory Holding Cost for WIP During Manufacturing The cost...

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