Question

. A grocery shop that makes candles offers a scented candle, which can be produced at a rate of 36 boxes per day and used 12 boxes per day. Assume that demand is uniform throughout the year and the shop opens for 360 days. Setup cost is $15 for a run, and holding cost is $1.5 per box on a yearly basis. Please compute the following tasks using EPQ model: (a) The economic run size (b) The maximum inventory (c) The total cost

Answer 1

Ans:

EPQ Model:

EPQ stands for Economic Production Quantity model. It is a model which determines the level of inventory a firm should order in order to minimize the total ordering and holding cost.

Calculations are hand written:

Ans=(a) Economic Run Size = ? y Farmula: Economic Run size (0) 2DS H[-] where, D = Annual Demand S = Ordering Cost HE Holding Cost P= Production y Given, Annual Demand = 12 x 360 = 4320 g= $15 HE $1.5 P- 36 x 360 = 12960 -> Calculation :- 2 x 4320x15 Q: 4320 12960 129600 - N129,600 360 Economic Run Size - 360

And= (b) Marimum Inventory - Formula :- Iman р y Calculation :- Iman = 360 1-4320 12960 - 240 boxes Marimum Inventory = 240 boxes Ans=(C) Total Cost = ? y Formula :- TC = Iman 2 XH - Calculation: TC=4320 [8 *5] + [ 2x 15] + [240 x 15] [ 360 = 180 + 180 = $360 Total Cost = $360

Ans (a): Economic Run Size = 360 boxes

Ans (b): Maximum Inventory = 240 boxes

Ans (c): Total Cost = $360