Question

Mohawk Manufacturing requires 10,000 castings a year for use in assembling lawn and garden tractors. The foundry can produce 30,000 castings a year. The cost associated with setting up the production line is $25, and the carrying cost per unit is $2 annually. Lead time is 60 days.

a. Find the production quantity that minimizes cost.

b. Calculate the total annual cost of setting up for and carrying inventory, based on the answer to part (a) for a year.

Answer 1

Ans a.

Given Details

Annual Production 30,000 units

Set Up cost =$25 per set up

Carrying cost per unit per year=$2

Economic Production Size = Sq Root of [(2*Set up cost*Annual usage)/Carrying cost per unit]

EPS= Sq Rt [(2*30,000*25)/2]

EPS =866 Castings

So Economic Production size that minimizes cost is 866 castings

Ans b.

So Economic Production size is 866 castings

Annual Set ups required =30,000/866=34.64

Annual Set up cost =34.64*25= $866.0

Average Inventory carried =866/2=433

Annual Inventory carrying cost =2*433=$866

So Annual cost of setting up=$866

Annual cost of carrying inventory =$866