Question

17. Production planning. DirectCo sells an item whose demand over the next four months is 100, 140, 210 and 180 units, respectively. The company can stock just enough supply to meet each month's demand, or it can overstock to meet the demand for two or more successive and consecutive months. In the latter case, a holding cost of $1.20 is charged per overstocked unit per

Answer 1

1. The planning of ordering size such that to minimise the cost of holding and ordering can be done by the principal of Economic Order Quantity.
2. Economic order quantity is calculated by using the formula √(2ao)/c where a is the consumption of raw material, o is the order processing cost and c is the carrying cost per unit per annum.
3. In the given case a = 100+140+210+180 = 630, o = 200, c = 1.2
4. Substituting the values
   1. √(2*630*200)/1.2 = √210000 = 458 units.
5. Placing an order of 458 units will keep the total costs to minimum. And it also satisfies the condition as to as low orders as possible.
6. The above quantity is due to the high order cost that carry cost so we should keep the number of orders to minium.