Question

Energy Sol Corp. produces a certain energy-saving device. The demand for the device, D, is 1,800 units per year (or 6 units each day (i.e., d = 6), assuming 300 working days in a year). The company can produce at an annual rate, P, of 7,200 units (or 24 per day, i.e., p = 24). Setup cost, S, is $300. There is an inventory holding cost, H, of $36 per unit, per year. Mr. Sharp, Operations Manager of the company wants to determine the economic production run size (optimal production quantity) that will minimize the annual total cost. But without knowing any quantitative techniques, Mr. Sharp just produces 72 units per setup (i.e., Q = 72). Is Q = 72 optimal?

a. What is the maximum possible inventory (I ) when they complete the production of 72 units?

b. What is the annual total cost (TC) of the current policy (Q = 72)?

c. Determine the optimal production quantity using the EPRS approach? What is the minimum total cost? How much can Mr. Sharp save by using the EPRS approach instead of the current policy?

Answer 1

Economic Production Quantity is the number of unit that is added to the inventory which minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.