ENDING CORPORATION

PRACTICE PROBLEM

Ending Corporation produces fireworks in various forms. A cardboard tube, Part No. M-45, is
manufactured rather than ordered from an outside supplier. The company estimates that its
need each year for this tube is 5,800 gross and that variable manufacturing costs are P60 per
gross. Setup costs amount to P162 per production run, and storage costs are equal to 5% of
variable manufacturing costs.

REQUIRED:

Determine the optimal size of a production run and the total annual setup cost and total
carrying cost at that size.

Given:

Annual Usage 5,800 gross

Variable Manufacturing Overhead: P60 per gross
Setup costs: P162 per production run
Storage costs 5% variable manufacturing costs

Optimal size of production run

2(Annual demand  setup costs)
EPR 
Manufactur ing costs  storage costs percentage
2(4,800  P162)
EPR 
P60  5%
1,555,200
EPR 
3
EPR  518,400
EPR  720 units

Total Annual Cost = (Annual Demand / Optimal size) x Setup Costs

= (4,800 units / 720 units) x P162
Total Annual Cost = P1,080