Question

A manufacturer needs to make 100,000 chairs annually. Each chair costs $25 to produce and it costs $500 to set up the factory to produce each batch. The annual warehouse cost is $1 times the maximum number of chairs stored. How many chairs should the plant produce in each batch to minimize total costs?

Answer 1

Number of chairs to produce that minimizes the total costs =economic order quantity.

Given : Annual demand=100000

set up cost =$500 =Fixed cost=cost per order

Annual warehouse cost=$1 * Maximum number of chairs stored

holding cost per unit per year=Annual warehouse cost/Maximum number of chairs stored=$1

Economic order quantity is given by the formula ,

EOQ=sqrt(2*Annual demand*cost per order/holding cost per unit per year)

=sqrt(2*100000*500/1)

=10000

Number of chairs the plant should produce in each batch=10000