Question

The annual demand for a certain item = 20000 pc/yr. One unit of the product costs $35.00, and the holding cost rate = 15%/yr. Setup time to produce a batch = 4 hr. The cost of equipment downtime during setup plus associated labor = $250/hr. Determine the economic order quantity and the total inventory cost for this case.

Answer 1

The formulafor economic order quantity EOQ is

Where s is setup cost, D is demand, P is production cost and i is interest rate

now s the setup cost will be 4*250=1000

EOQ=

EOQ=756 units

The total inventory cost is

where Q is order quantity, H is holding cost, D is demand and s is setup cost.

=756*35*0.15/2 + 20000*1000/756 = $28439.5