To minimize overall expenses for Foggy Optics, Inc., the company needs to balance setup and holding costs while meeting sales demand, with the number of production runs best determined using the Economic Order Quantity model.
The question focuses on a common business problem of minimizing expenses related to the production and storage of goods, in this case, laboratory microscopes made by Foggy Optics, Inc. Finding the number of production runs that minimize the overall expenses requires an understanding of inventory cost management, which includes both setup costs and holding costs. In the scenario presented, the setup cost for each production run is $4000. The insurance cost, which is based on the average inventory, is $10 per microscope per year, while the storage cost, based on the maximum inventory, is $20 per microscope per year.
To minimize the overall expenses, we need to find an optimum point where these costs are balanced. The formula for the Economic Order Quantity (EOQ) model can be used to determine the most cost-effective number of microscopes to produce in each production run. The EOQ takes into account the setup costs, the holding costs, and the demand rate to find the quantity that minimizes total costs. However, the specific quantitative solution requires the application of this model to the given costs and expected sales rate of 4000 microscopes per year.
In conclusion, the most cost-effective number of production runs will be the one that balances these costs while meeting the expected sales rate, which can be calculated using the EOQ formula or other inventory management techniques that take into account the provided cost parameters.