Question

Kroft Foods makes cheese to supply to stores in its area. The dairy can make 320 kilograms of cheese per day, and the demand at area stores is 220 kilograms per day. Each time the dairy makes cheese, it costs $170 to set up the production process. The annual cost of carrying a kilogram of cheese in a refrigerated storage area is $15.

Determine the optimal order size and the minimum total annual inventory cost. (Round answers to 2 decimal places, e.g. 52.75.)

Answer 1

Demand / production ratio for dairy d/p = 220/320=0.6875

If we assume that the dairy operates for all 365 days, the annual demand = 365 x220 = 80300

EPQ = [ 2 x demand per annum x cost of set up / cost of holding one unit per annum x (1d/p)]^0.5

= [ 2 x 80300 x 170 / 15 x ( 1-0.6875)]^0.5

= 2413 units

Total inventory cost = ordering cost + holding cost

Holding cost = Q/2 x 15 x(1-d/p) = 2413/2 x 4.6875 =5655.46

Set up cost = 170x(80300/2413)=5657.27

Total cost =11312.73