Question

Great Buy Inc. manufactures and then sells the Model x15  DVD Players. It costs GB Inc. $57 to produce a unit, and the estimated annual demand for DVD players is 4500 units. Great Buy Inc. used to hold 100 units safety stock to prevent occasional shortages. GB Inc. uses 15% rate of holding cost a year, and setting up its production line each time a production run is planned costs $900. Production capacity for the DVD Player is 6000 units. Currently , Great Buy Inc. produces in lots that meet two months of demand. Answer the following question.

1.

a) What is the total cost of the current policy ?
  

b) For the current policy of part 'a', what % of the time, the production line is not busy producing the DVD players?

Answer 1

Annual Demand = D = 4500 units

Cost per unit = C = $57

Holding Cost = H = 15% = 15% * 57 = $8.55

Cost per run = S = $900

Safety Stock = SS = 100 units

Production capacity = 6000 units

Current Production size = Q = 2 months capacity = (2/12) * 4500 = 750 units

Total Cost = Ordering cost + Annual Holding Cost = No. of order per year * Ordering cost + (Average Inventory + Safety Stock)* Holding cost

No. of order per year = D / Q = 4500 / 750 = 6

Max. Inventory = Q * = 750 * = 187.5

Average inventory = Max. Inventory / 2 = 187.5 / 2 = 93.75

Total Cost = 6 * 900 + (93.75 + 100) * 8.55 = 5400 + 1,656.56 = $7,056.56

Production cycle = 2 months

Monthly production = 6000 / 12 = 500

Time required for production = 750 / 500 = 1.5 months

Time when production line is not busy = 0.5 months

% of time when production line is not busy = 0.5 / 2 = 0.25 = 25%

Answer: a) 7056.56

b) 25%

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