Question

Kellam Images prints snack food bags on long rolls of plastic film. The plant operates 250 days a year. The daily production rate is 6000 bags, and the daily demand is 3500 bags. The cost to set up the design for printing is €300. The holding cost is estimated at 2 cents per bag. a. What is the recommended production lot size? b. If there is a five-day lead time to set up the line, what is the recommended reorder point?

Answer 1

a.

Annual demand (AD) = Daily demand × Days in a year

                                    = 3,500 × 250

                                    = 875,000

Holding cost or carrying (H) = 2

Setup cost (S) = 300

Now, by the use of formula as below:

Desired production = [(2 × AD × S) / H] ^ 0.5

                                = [(2 × 875,000 × 300) / 2] ^ 0.5

                                = (525,000,000 / 2) ^ 0.5

                                = 262,500,000 ^ 0.5

                                = 16,202 rounded to whole number.

Answer: 16,202 bags.

b.

Reorder point = Daily demand × Lead time

                        = 3500 × 5

                        = 17,500 bags (Answer)