Question

Charles cycles produces bicycles and cycles, set up cost when switching production from one to other is $1000. on average, retail customers order 150 tricycles per day(consider 250 day year). the daily production rate for tricycles is 600 units. unit cost of a tricycle is $60 and the company has determined inventory carrying cost to be 15%.
what is production order quantity?

Answer 1

Setup cost = $1000

Per day demand = 150 tricycle

Daily production rate= 600 units

Units cost tricycle= $60

Carrying cost = 15% = 60 * 15% = $9

what is production order quantity (POQ) ?

Ans: 3334 units

POQ = root off ( (2DS) / ( H * ( 1 - (d/p)) ))

Where,

D = Demand for the year = 150 * 250 = 37500 units

S = Setup cost = $1000

H =holding cost = Carrying cost = $9

P = Daily production rate= 600 units

d = Per day demand = 150 tricycle

POQ = root off ( (2*37500*1000) / (9 * ( 1 - 150/600) )

POQ = root off ( 75000000 / ( 9 * ( 1 - 0.25 ))

POQ = root off ( 75000000 / (9 * 0.75 )

POQ = root off ( 75000000 / 6.75 )

POQ = root off ( 11111111 )

POQ = 3333.33 units round to 3334 units

At production rate of 600 units per day , this production quantity will require approximate 5.6 ( 3334 / 600 ) days to complete