Question

Initial: Assignment 5 - Page 7 of 8 Due: 2/19/2020 5. [20 points) Ross Whites machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. Ross White is considering making the brackets in-house. He has determined that setup costs would be $180 in machinist time and lost production time, and 100 brackets could be produced in a day once the machine has been set up. Ross estimates that the cost (including labor time and materials) of producing one bracket would be $10. The holding cost would be 10% of this cost. There are 250 working days yearly. (a) What is the daily demand rate? (b) What is the optimal production quantity? (c) How long will it take to produce the optimal quantity? How much inventory is sold during this time? (d) I Ross uses the optimal production quantity, what would be the maximum inventory level? What would be the average inventory level? What is the annual holding cost? (e) How many production runs would there be each year? What would be the annual setup cost2

Answer 1

a. Daily demand rate= Annual demand / no. of working days per year

=2500/250

=10 brackets per day

b. Calculating Optimal quantity

Annual usage=2500 units, Setup cost = $180, daily demand=10, daily production=100, holding cost per unit= $1 ($10*10%)

Optimal production quantity = square root of [2 * (Annual Usage in Units * Setup Cost) / holding cost per unit (1-(daily demand/daily production)) ]

=square root of [2*(2500*180)/ 1 (1-(10/100)]

=square root of[ 900,000/0.9]

=square root of 1,000,000

Optimal order quantity = 1000

c. 100 brackets can be produced in 1 day

It will take 10 days to produce 1000 brackets

Hence it will take 10 days to produce optimal order quantity

e. No. of production runs each year= Annual demand/ Optimal order quantity

=2500/1000

=2.5