Question

Jan Sport produces school bags. The demand for school bag is 10 per day. Machine set up cost for production of school bag is $120, and total material and labor cost per bag is $10, storage and handling costs are $15 per bag per year. Suppose there are 250 working days per year. Compute the EOQ as well as the total annual cost for school bag production and storage in Jan Sport.

Answer 1

Annual demand (AD) = 250 days × 10 per day = 2,500 bags

Production cost per bag (C) = $10

Handling cost (H) = $15

By the formula:

EOQ = [(2 × AD × C) / H] ^ 0.5

            = [(2 × 2,500 × 10) / 15] ^ 0.5

            = (50,000 / 15) ^ 0.5

            = 3333.33 ^ 0.5

            = 58 bags (rounded)

            = 58 (Answer)

Total cost = (EOQ / 2) × H + (AD / EOQ) × C

                 = (58 / 2) × 15 + (2,500 / 58) × 10

                 = 435 + 435 approx. (since at EOQ total H and C should equal)

                 = $870 (Answer)

Note: machine setup cost should not be considered here, since this may not be an annual cost.