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Finding economical lot size, carrying and annual costs

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The famous Widget Company sells widgets at the rate of 80,000 units per year. Each widget sells for $100, and it costs 30 percent to carry widgets in inventory for a year. The process of widget production has been automated over the years, and it now costs $1,000 to change over the widget production line to other products which are made on the same line.

a. What is the economical lot size for production of widgets?
b. How many lots will be produced each year?
c. What is the annual cost of carrying widgets and the annual cost of changeover?
d. What factors or changes in assumptions might cause the Widget Company to produce a larger lot than the economic lot size calculated in part a?

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Solution Summary

Solution describes the steps for finding economic lot size, number of lots, annual carrying costs and annual cost of changeover. It also discusses the factors which may be responsible for producing lots above economic size.

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The famous Widget Company sells widgets at the rate of 80,000 units per year. Each widget sells for $100, and it costs 30 percent to carry widgets in inventory for a year. The process of widget production has been automated over the years, and it now costs $1,000 to change over the widget production line to other products which are made on the same line.

a. What is the economical lot size for ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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