Question

In: Operations Management

A manufacturing firm is considering two locations for a plant to produce a new product. The two locations have fixed and variable costs as follows:

A manufacturing firm is considering two locations for a plant to produce a new product. The two locations have fixed and variable costs as follows:


Location A

Location B

Monthly Fixed Cost ( $ )

$20,000

$14,000

Unit variable cost ( $ /unit)

(including labor, material and transportation cost)

$5

$7

At what monthly production volume would the company be indifferent between the two locations?

Select one:

a. 6,000 units

b. 4,500 units

c. 3,000 units

d. 1,500 units


A company is about to begin production of a new product. The manager of the department that will produce one of the components for the product wants to know how often the machine used to produce the item will be available for other work. The machine will produce the item at a rate of 200 units a day. Eighty units will be used daily in assembling the final product. Assembly will take place 5 days a week, 50 weeks a year. The manager estimates that it will take almost a full day to get the machine ready for a production run, at a cost of $300. Inventory holding cost will be $10 a year.

How many days does it take to produce the optimal run quantity ?

a) 4.85

b) 6.05

c) 7.07

d) 8.03

Solutions

Expert Solution

1. At 3000 units monthly production volume the company would be indifferent between the two location.

Location A: 20000 + (5*3000) = $35000

Location B: 14000 + (7*3000) = $35000

2. We have following information:

Daily demand = 80 units

Demand for 1 week = 80 * 5 = 400 units

Annual demand, D = 400 *50 = 20,000 units

Set-up cost S = $300 per order

Annual Inventory holding cost, H = $10 per unit per year

Economic order quantity is the run quantity to minimize the total annual cost

Formula of economic production quantity (EPQ)

EPQ = Q = √ (2 * Annual Demand * Set-up cost/ Inventory holding cost)

Therefore

EPQ = Q = √ (2 * 20,000 *$300 / $10)

EPQ = Q =√ (1,200,000) = 1,095.45 or 1,095 units (rounding off to nearest whole number)

The run quantity to minimize the total annual cost is 1,095 units

The machine will produce the item at a rate of 200 units a day

Therefore,

Length of production run for the optimal run quantity = economic production quantity/ production per day

= 1,095 units /200

= 5.48 days

It will take 5.48 days to produce the optimal run quantity

keosha answered 1 year ago
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