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Finding optimum production

A manufacturing company sells its products directly to customers and operates 5 days a week, 52 weeks a year. The production department of this company can produce at the rate of 60 units per day. The setup cost for a production run is $125.00. The cost of holding is $4.00 per unit per year. The demand for the item is continuous and constant and is 3,900 units per year. (Note: The demand occurs only when the company is operating, that is, 5 days a week for 52 weeks). Find the optimum number of units to be produced in one batch (economic production quantity). Round the number to the nearest integer.

a)3900
b)570
c)494
d)300
e)60

Solution Preview

Dear Student:

This problem requires you to use the Economic Order Quantity formula that is modified for production:

Qp = Square root of [ (2DS) / (H*(1 - d/p)) ]

Where D = annual demand in units, S = setup cost per setup, H = holding cost per unit per year, d = annual ...

Solution Summary

This solution explains in detail how you find the optimum production quantity and minimize costs using the economic production quantity approach.

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