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Calculate the economic production quantity

A bicycle parts supplier utilizes a press to produce a number of parts to a major bicycle manufacturer. One of the parts manufactured on the press has an annual demand of 50,000 units. The part is produced at a rate of 600 units per day. There are 250 working days throughout a year. The annual inventory carrying cost is estimated to be \$25 per part. Each setup is done by two employees together and takes 66 minutes to complete. Each employee is paid \$15/hr. The company makes a profit of \$341/hr. when the press is working.

a) Using the information provided, show that the setup cost is \$408.1/setup.
b) Calculate the economic production quantity.
c) Calculate the annual minimum total cost.
d) How many working days does each production run take?
e) What is the level of maximum inventory?
f) What is the cycle time (i.e. the time between two setups)
g) If the company wants to reduce the economic production quantity in line with just-in-time practices, what do you suggest in order to achieve this goal? Justify your response.

Solution Preview

a) Set-up Cost = 2 * (66/60) * 15 + 341 * (66/60) = \$408.1
b) EOQ = ((2*50,000*408.1/25) * (600/(600-200)))0.5 = 1564.80 units
d = D/250 = 50,000/250 = 200 ...

Solution Summary

Formulas given and computed for you with discussion.

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