Question

Please answer question 2 and 3.

Q2 (33 points) A manufacturer produces and sells bottled drinks. Their production capacity is 570 units daily, but their sales at the moment are estimated at 400 units per day. The manufacturer produces Mondays through Fridays. The variable cost for production is $1.5. The manufacturer incurs about $250 labor cost per production order for setups. Accounting estimates annual holding costs as $0.30 per unit. a) Determine the optimal production quantity for the bottled drinks. b) What is the production order cycle length i.e. time between production orders? c) What is the expected number of production orders per year? d) How long is the production time in each order cycle? e) What is the expected down time in the production line? f) What is the expected annual cost with this production policy? Q3 (34 points) A purchasing agent for a company is looking at three vendors for the procurement of an electronic part that goes into the final product. Vendor A sells each unit for $5. Vendor B will make a discount of S0.20 if the purchase quantity is greater or equal to 5000 units and Vendor C will make a discount of $0.40 if the purchase quantity is greater or equal to 7500 units. Each order takes time for processing and accounting estimates $150 per order labor time. Annual demand is forecasted at 60,000 units for this item. The holding cost will be estimated based on a 20% interest rate. The supplier commits to a delivery lead time of 4 weeks. The company works 5 days a week. a) How many units should be ordered? b) Which Vendor to use? c) What is the expected annual cost with this production policy? d) What is the reorder point? e) What is the order cycle length i.e. time between orders? 1) What is the expected number of orders per year?

Answer 1

(a) demand / production ratio = 400/570 =0.7017

Working days per year = 5x52 = 260 days

EPQ = [ 2 x demand per year x set up cost / cost of holding one unit per year x ( 1-d/p)]^1/2

= [ 2 x 400x260 x250 / 0.3 x ( 1-0.7017)]^1/2

= 24105

production run time = 24105 / 570 =42.29

time taken to consume this amount =24105 /400 = 60.26

time between the runs = 60.26-42.29 = 17.97

c. number of orders per year = 400x260 /24105 = 4.314

d.production timme =42.29

e Down time = 17.97

f annual cost = cost of purchase + cost of holding + cost of orders

= 1.5x400x260 + 24105/2 x0.3x0.2983 + 4.314x250 =

= 156000 +2157 =158157

2.

EOQ with price 5 per item

= [ 2 x demand per year x cost of ordering / cost of holding one unit per year]^1/2

= [ 2x60000x150/0.2x5]^1/2 =4243

cost with this value = purchase cost + holding cost +ordering cost

= 60000x5 + 4243/2x1+(60000/4243 ) x 150

= 304243

cost with suppler B

= 60000x4.8 + 5000/2 x 4.8x0.2+ 60000/5000 x150

= 288000+960+1800 =290760

cost with supplier C

= 60000x4.6 + 7500/2x4.6x0.2+ 60000/7500x150

276000+1380+1200

=278580

Supplier C is the best as it has least cost of 278580

ROP = demand during lead time

= 5x4 x60000/260 = 4613.38

= 4614

Time between orders = 7500 / consumption per day

= 7500 x260 / 60000 = 32.5 days

Number of orders = 60000/7500 = 8