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Calculating optimal size of production & inventory costs

Radovilsky Manufacturing Company, in Hayward, California, makes flashing lights for toys. The company operates its production facility 300 days per year. It has orders for about 12,000 flashing lights per year and has the capability of producing 100 per day. Setting up the light production costs $ 50. The cost of each light is $ 1. The holding cost is $ 0.10 per light per year.
a) What is the optimal size of the production run?
b) What is the average holding cost per year?
c) What is the average setup cost per year?
d) What is the total cost per year, including the cost of the lights?

Solution Preview

a) What is the optimal size of the production run?
Annual Demand=D=12000 units
Annual Holding cost=Ch=0.10 dollar
Setting up Cost=Co=50 dollar
Optimal size of production= (2*D*Co/Ch)^0.5 =(2*12000*50/0.10)^0.5= 3464 units

b) What is ...

Solution Summary

Solution describes the steps to calculate optimal size of production and annual inventory costs.