Question

(Round your responses to two decimal places in this question if needed) Radovilsky Manufacturing Company, in Hayward, California, makes flashing lights for toys. The company operates its production facility 300 days per year. It has orders for about 9,000 flashing lights per year and has the capacity of producing 60 per day. Setting up the light production costs $49. The holding cost is $0.10 per light per year.

1.What is the optimal size of the production run?

2.What is the annual holding cost?

3. What is the annual setup cost?

4. What is the total cost per year?

Answer 1

Annual demand, D = 9,000 units
Daily production rate, p = 60 per day
Setup cost, K = $49 per setup
Holding cost, h = $0.10 per annum

(1)

Daily demand rate, d = D / 300 = 9000 / 300 = 30 units per day

Optimal run size, Q_p = [2.D.K.p / {h.(p - d)}]^1/2 = SQRT(2*9000*49*60/(0.10*(60 - 30))) = 4,200 units

(2)

Annual holding cost = (Q_p/2) * (1 - d/p) * h = (4200/2)*(1 - 30/60)*0.10 = $105

(3)

Annual setup cost = (D/Q_p)*K = (9000/4200)*49 = $105

(4)

Total annual inventory cost = 105 + 105 = $210