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A company makes a component for one of its products in-house. It uses an average of 5000 of these throughout the year. The production rate for these components is 500 per week, and the cost of holding one item for the year is $ 1.50. The factory is open for 50 weeks per year. The company has calculated that economic batch quantity is 2000. What is the production setup cost per batch.
Answer: $ 480
If you wish for me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
(And to calculate, you use the formula for the economic batch quantity backwards. The formula is given on the formula sheet, and using it is explained in my free lectures.)
@kadean56 said:
How do you calculate this question?Using the formula of Economic Batch Quantity,
EBQ = ?(2*CO*D)/CH(1-D/R)Here,
EBQ = 2,000
CO = ?
D = 5000
CH = 1.5
R = 500 per week = 25000 per year (50 weeks)Putting values in the formula.
2,000 = ?(2*CO*5000)/1.5(1-5000/25000)
2,000 = ?(CO*10,000)/1.2
To remove square root, we have to take square on both sides.
2,000^2 = CO*10,000/1.2
4,000,000 = CO*10,000/1.2
Rearranging the equation,
4,000,000*1.2/10,000 = CO
CO = $480
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