4.a) Find the savings between the total cost of the current production run size and the optimal run size.
b) Find the additional savings in production costs and ordering and holding costs with the proposed project. Calculate the payback period for the investment in the project.
The anticipated annual demand for a chemical product distributed by the Seanna Chemical Group is 25,000 tons per year for the coming year. The company is currently producing the product with a capacity of 80,000 tons/year and a production line setup cost of $4,000/production run. Assume that the variable cost for the production is $400/ton and the unit holding cost is estimated as 25% of the variable cost. The company operates 250 working days per year.
a) The current production run size is 5,000 tons/run. How much can Seanna save by optimizing the ordering policy (that is, by using the EOQ model with a finite delivery rate)?
b) Suppose that Seanna recently implemented the optimal policy in part (a) and the Engineering Department is now proposing an investment of $2 million to renovate its facility for this product, which would reduce the variable cost to $380/ton and the line setup cost to $3,000/production run. What will be the annual savings that Seanna may achieve from this (in terms of the sum of production and fixed ordering and holding cost)? As the Chief Operating Officer of the company, would you consider this proposal?
We have the following information (in tons)
Demand (D) = 25000
Setup cost (S) = 4000
Holding cost (H) = 100
Current production run (Q) = 5000
a) The current expense incurred are the holding expense and ordering expense.
Annual holding (carrying) cost is given by HQ/2 = 100*5000/2 = 250,000
Ordering cost is given by DS/Q = 25000*4000/5000 =20,000
The total cost is 250,000+20,000 = 270,000
Now let’s find the Economic order quantity (EOQ) using the formula
EOQ = sqrt (2DS/H) = sqrt (2*25000*4000/100) = 1414.21 (we can round it to 1414.
Now let’s determine the total cost using economic order quantity.
Total cost is (100*1414/2) + (25000*4000/1414) = 70700 + 70721 = 141,421
This means through EOQ the savings is 270,000 - 141,421 = 128,579
b) With the new project the changes are
Setup cost (S) = 3000
Holding cost (H) = 95 (25% of 380)
Rest of the information remains the same.
This means the new EOQ will be sqrt (2*25000*3000/95) = 1256.56 (round it to 1256)
The new annual cost will be (95*1256/2) + (25000*3000/1256) = 59660 + 59713 = 119,373
The total saving from the previous operation is 141,421 – 119,373 = 22,048
Considering that this project requires a $2 million investment, and provides an annual saving of $22,048 I will not consider this proposal.
4.a) Find the savings between the total cost of the current production run size and the...
A chemical distributor can purchase raw material from Mexico at three different price policies. Complete the shaded cells and answer the following questions. Policy Discount Quantity (lbs) Discount (%) Discount Price (C) per lb EOQ Feasible/Not feasible Optimal Order Size for the discount range policy 1 0 to 199 No discount 20 565 ______________ _____________ 2 200 to 800 5 19 580 Feasible 580 3 801 and above 10 18 ___ ______________ ___________ (Annual demand = 20000 lbs; Ordering cost...
A local family sports store sells basketball. The store orders the balls from a manufacturer at a cost of $250 per order. The annual holding cost is $6 per unit per year. The purchase price of a basketball is $40 per unit per year. The store has a demand for 48,000 balls per year. The s tock is received 5 working days after an order has been placed. No backorders are allowed. Assume 300 working days a year. a. What...
QUESTION 30 The total output from a production system in one day is 500 units and the total labor necessary to produce these 500 units is 250 hours. Using the appropriate productivity measure, which of the following numbers represents the resulting productivity? a. 1.000 b. 1.428 c. 0.700 d. 0.411 e. None of these. QUESTION 31 The basic EOQ model includes a. annual holding and shortage costs. b. annual ordering and holding costs. c. annual stockout and ordering costs. d....
A certain company uses the Lot-for Lot run size for its production. The company has a holding cost of 3% per week on unsold inventory. Setup costs for a production run are $24.36. Consider the following MRP table: Find letter l in the table and calculate the value that should be there Holding Net Production Period Requirements Quantity Total Cost Cost Setup Cost p 1 81 Ending Inventory f g h a k u - V 115 78 b с...
A certain company utilizes the Economic Order Quantity Run Size for its MRP Schedule. The company has determined the EOQ is 180 units, the holding costs is 2.1% per unit per week, the cost to produce a unit is $1, and the the setup cost is $33.96. Consider the the following MRP schedule: Find the letter A in the table and calculate its value: Net Week Requirements 1 84 76 3 93 4 80 5 61 Production Quantity А B...
A product has a demand of 436 units per month. Ordering cost is $20, and holding cost is $4 per unit per year. The EOQ model is appropriate. The total management cost (holding and setup costs only) for this product will be per year. demand 436 per month order cost $20 per order holding cost $4 per unit per year Excel Access QUESTION 29 A drone company builds its own motors, which are then put into each drone. While the...
A chemical plant produces sodium bisulfate in 150 kg bags. Demand for this product is 20 tonnes per day. The capacity for producing this product is 55 tonnes per day. Setup cost is $320, and storage and handling costs are $150 per tonne per year. The company operates 220 days a year. (Note: 1 tonne = 1,000 kg). a. What is the optimal number of bags per production run? (Round your intermediate calculations to 2 decimal places and the final...
Rudd Company uses 40,000 micro-chips each year in its production of digital cameras. The of placing an order is $75. The cost of holding one unit of inventory for one year is $8. Currenty Rudd places 20 orders of 2,000 units per order. cost Compute: (a) The annual ordering cost. (2 marks) (2 marks) (2 marks) (2 marks) (b) The annual carrying cost. (c) The total cost of Rudd's current inventory policy. (d) The economic order quantity. (e) The order...
Value Gadgets Corp. produces J-Pods, music players that can download thousands of songs. Value Gadgets forecasts that demand in 2017 will be 19,500 J-Pods. The variable production cost of each J-Pod is $50. In its MRP system, due to the large $22,750 cost per setup, Value Gadgets plans to produce J-Pods once a month in batches of 1,625 each. The carrying cost of a unit in inventory is $21 per year. Question: 1. Using the MRP system, what is the...
A5: Packing Crate Inventory MGT305 You’ve recently been hired as a project manager at a distributor of fruits and vegetables located in Northern Kentucky. An operations manager has asked for your help in analyzing current inventory policies related to packing crates. She’s looking for a lower cost policy. Currently, the operation buys crates from a regional supplier. The operation uses 1800 crates each month. Annual carrying cost is 18% of the $6 acquisition cost per crate. Each order costs approximately...