Question

Inventory Control

You are the production manager of GVT Manufacturing, a company that manufactures a wide range of products, including fire extinguishers. Data shows that GVT is projected to manufacture 30,000 of these fire extinguishers next year. A production-year for GVT covers 300 days. Information on the product also reveals that each extinguisher requires one handle. Additional information gleaned from the production records shows the following: annual carrying cost per handle is US$1.50; production setup cost is US$150 and daily production rate is 300 handles. Required a) Calculate and state the optimal production order quantity that will minimise inventory costs. b) Calculate and state the corresponding inventory costs from the quantity calculated in (a).

Answer 1

Answer a):

Though the annual production capacity of handles is 90000 units, but since the demand of fire extinguisher is only 30000 units and each fire extinguisher requires 1 handle each so, annual demand for handles is 30000 units.

A = Annual Demand	30000	unit per year
S = Setup cost	150	$ per order
C = Carrying or holding cost	1.5	$ per unit per year

Optimal production quantity = Economic production quantity (EPQ)= √2AS/C

Optimal production quantity = 2499 units

Answer b)

Number of production orders = A / EPQ = 30000/2499 = 12.25 orders

To meet the demand we need to have at least 13 production order (as 12 orders will give 29388 units; and 13 orders will give 31837 units)

Number of production orders = 13 orders

Annual Setup cost = Number of production orders* Setup cost per order = 13*150 = $ 1950

Annual Holding cost = (EPQ/2)*Holding cost = (2499/2)*1.5 = $ 1874.25

Total inventory cost = Annual Setup cost + Annual Holding cost = 1950+1874.25 = 3824.25