Question

A clothing manufacturer town $1.5M to purchase new machines. The annual debt payment is $270,000. The machines can make 6 different types of shirts but the machines must be shut down for one day each time it switches products in another type of shirt. The manufacturer spends about 30 days per year due to changeovers. The annual debit payment over these 30 days yields $9000 per day. How would the company use this cost $9000 as an input to the EOQ model to determine optimal production sizes for each type of shirt?

a. Yes, $9000 in incurred per day independent of the subsequent production volume, so it is the setup cost in the EOQ model
b. Yes, $9000 is incurred per day independent of the subsequent production volume, so it is the holding cost is the EOQ model
c. No the square root of $9000 should be input into the EOQ model as the setup cost
d. None of them is correct

Answer 1

The clothing manufacturer's $9,000 daily expense during machine changeovers is a setup cost in the EOQ model which helps determine optimal production sizes.

Step-by-step explanation:

The $9,000 incurred by the clothing manufacturer per day during machine changeovers for different shirt productions is considered a setup cost in the Economic Order Quantity (EOQ) model. In the context of EOQ, setup cost refers to the cost associated with the change or setup for production runs of different products, which in this case, is the shutdown required to switch between different types of shirts. The EOQ model utilizes this setup cost to help determine the optimal production quantities that minimize total costs, which include both setup (changeover) and holding costs. Holding costs pertain to the expenses incurred for storing inventory, not for changing over production. Therefore, the answer is: a. Yes, $9000 is incurred per day independent of the subsequent production volume, so it is the setup cost in the EOQ model.