Question

Radovilsky Manufacturing? Company, in? Hayward, California, makes flashing lights for toys. The company operates its production facility 300 days per year. It has orders for about 12,100 flashing lights per year and has the capability of producing 95 per day. Setting up the light production costs ?$52

.

The cost of each light is ?$1.00

.

The holding cost is ?$0.05

?a) What is the optimal size of the production? run?

?b) What is the average holding cost per? year?

?c) What is the average setup cost per? year?

?d) What is the total cost per? year, including the cost of the? lights? ?(round your response to two decimal? places).

Answer 1

Given information:

Annual demand (D) = 12,100 units   

Daily production rate (p) = 95 units per day

Cost of each light = $1.00

Setup cost (S) = $52   

Holding cost (H) = $0.05

Number of days = 300 days per year

Daily demand = Annual demand / Number of days = 12100 / 300

Daily demand (d) = 40.33 units per day

Solution:

(a) Optimal size of the production run or Economic Production Quantity (EPQ) is calculated as;

EPQ = SQRT (2 x D x S) / [H x (1 - d/p)]

where,

D = Annual demand

S = Setup cost

H = Holding cost

EPQ = SQRT (2 x 12100 x 52) / [0.05 x (1 - 40.33/95)]

EPQ = 6587.34 units

(b) Average holding cost per year is calculated as;

Average holding cost per year = EPQ/2 x H x (1 - d/p)

Average holding cost per year = 6587.34/2 x 0.05 x (1 - 40.33/95)

Average holding cost per year = $94.77

(c) Average setup cost per year is calculated as;

Average setup cost per year = D/EPQ x S

Average setup cost per year = 12100/6587.34 x 52

Average setup cost per year = $95.51

(d) Total cost per year is calculated as;

Total cost per year = Average holding cost per year + Average setup cost per year + Cost of lights

Cost of lights = Annual demand x Cost of each light

Cost of lights = 12100 x 1.00

Cost of lights = $12100

Total cost per year = $94.77 + $95.51 + $12100

Total cost per year = $12,290.28