V.Kapoor question 13 • XYZ company sells a product @ 500/day throughout a working year of 250 days. Product is normally purchased by co. for sale@7/unit. Investigations have shown that it could be made @ 800/day. The direct cost /unit would be material Rs1.25, labor Re 0.50 &VC = Rs.2.25. Set up cost/batch would be 600& Holding cost have been estimated @ 25% p.a. Calculate qty to be manufactured in each batch & TC of mfg for year & per unit cost. Solution Annual Demand = 500*250 = 1,25,000 Ordering Cost = Rs. 600/order Cost of Holding = 25%(1.25 + .50 + 2.25) = Re 1/unit Production Rate = p = 800/day Usage rate = r = 500/day EBQ = √[ 2*1,25000*600/1.(1-500/800)] =20000 units Total Cost = {(Q/2)(1-r/p) +( R/Q)*Co + R*Cu} ={( 20000/2)(300/800)+ (125000/20000)*600 + 125000*4} = Rs.5,07,500/- REF: VKK Ch:12 Q3a) A company purchases raw material from outside supplier for its annual requirement. During the coming year, the company wishes to manufacture at a constant rate 100000 units of its product. The cost of placing each order is Rs 180. For item in inventory, the company uses an annual carrying cost equal to 20% of the item cost. The product costs Rs 20 each. Find the following: The optimal order size The total minimum inventory cost The number of orders to be placed in a year If the ordering cost changes from Rs 180 to Rs 80. What shall be a) EOQ b) Total minimum inventory cost Solution: a) Given R = 100,000 units Ordering cost (Co) = Rs180 Cu = Rs 20, f = 20% Holding cost/unit per year(Cc) = f* Cu = Rs 0.20*20 = Rs 4 Q = √2RCo/Cc = √2* 100000* 180/ 4 = 3000 units. Orders to be placed in a year= 100000/3000= 33.33 say 34 orders. Total inventory cost (TIC) = Q*Cc/2 + R*Co/Q + R*Cu = 3000*4/2 + 100000*180/3000 + 100000*20 = 6000 + 6000 + 2000000= Rs 20,12,000 When ordering cost (Co) changes from Rs180 to Rs80, we have EOQ = √2*100000*80/4 = 2000 units TIC = 2000*4/2 + 100000*80/2000 +100000*20 = Rs(4000 + 4000) + 2000000 = Rs 20,08,000 REF: VKK Ch:12 Q3b) XYZ furniture’s manufacture makes 25 chairs of certain model daily, so 100 legs are needed daily to continue production daily. The machine which makes chair legs can produce 200 legs per day. Set up costs for this machine is Rs 10000. The annual holding cost is Rs 40 per chair leg. Assuming 250 business days per year, how many chair legs should be made in each production lot if it is desired to minimize setup and holding costs. How many working days will be there between production runs. How many days does a production run last? Determine the total relevant costs of setting up production runs and holding chair legs in inventory. Solution 3b) Here, r = 100 legs, p = 200 units, Co = Rs 10000, Cc = Rs 40 R = 200*250 = 50000 units EBQ = √2RCo/Cc(1 – r/ p) = √2*50000*10000/ 40*0.5 = 7071 units Number of production runs = R/EBQ = 50,000/7071 = 7. 071runs Or 7 runs Days between production runs = Working days ÷ production runs= 250/7 = 35.71 , say 36 days Number of days production run last = EBQ/p = 7071/200 = 35.36 days Total cost (TVC) = √ 2 R. Co. Cc.(1 – r/ p) = 1,41,420