Question

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LEE is considering to manufacture many of the components. The cost to set up for producing a standard component is approximately $300 (considering labor, testing facilities etc.). Once set up they can produce at a rate of approximately 20 units /day (5,000 units per year) at a cost of $100 each. Annual demand is forecast at 2,000 units. If the firm uses 30% annual rate of inventory value for holding inventory:

1) What is the average inventory level?

A) 32.88 units B) 54.77 units C) 77.46 units D) 99.99 units E) None

2) What is the total inventory carrying cost/year?

A) $12,910 B) $2,323.8 C) $2,379.1 D) $3,873 E) None

3) What is the level of demand (i.e. the proportion of usage)?

A) 0.4 B) 0.6 C) 0.25 D) 0.75 E) None

Answer 1

Economic Production Quantity is the number of unit that is added to the inventory which minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.