Question

Part IV: Production Order Quantity Model

Radovilsky Manufacturing Company makes flashing lights for toys. The company operates its production 300 days a year. It has orders for about 12, 000 units per year and has the capability of producing 100 per day. Setting up the light production costs $50. The cost of each light is $1. The holding cost is $0.1 per light per year.

a) What is the optimal size of production run?

b) What is the average holding cost per year?

c) What is the average setup cost per year?

d) What is the total cost per year, including the cost of the lights?

Answer 1

Given, Demand (D)=12,000 units/year

p=100 units per day

Holding Cost (H) = $0.1 per unit per year

N=300 days per year

Setup cost (S)=$50

Cost of each light= $1

a) EOQ= (2DS/H)^0.5 = (2*12000*50/0.1)^0.5= 3464.101 units

b) Average holding cost per year = HQ/2 = (0.1*3464.101)/2 = $173.2050

c) Average setup cost per year = SD/Q = (50 * 12000)/3464.101 = $173.2051

d) Total annual cost = SD/Q + HQ/2 = $(173.2051 + 173.2050)= $346.4101

Total annual cost including cost of lights= 346.4101 + (1*12000) = $12346.4101