Question

Inventory Control and Planning Neilsen Cookie Company sells its assorted butter cookies in containers that have a net content of 1 lb. The estimated demand for the cookies is 1,200,000 1 lb containers. The setup cost for each production run is $490, and the manufacturing cost is $0.42 for each container of cookies. The cost of storing each container of cookies over the year is $0.5. Assuming uniformity of demand throughout the year and instantaneous production, how many containers of cookies should Neilsen produce per production run in order to minimize the production cost

Answer 1

48,497.42 containers

Step-by-step explanation:

The economic order quantity (EOQ) is a model that is used to determine the optimum order size that minimizes the balance of carrying and ordering cost.

This model can also be modified to determine the optimum batch quantity, that is the number of units to produced in a production run. The model is given below

EOQ = √2× Co× D/Ch

EOQ - economic production run, Co- set up cost per run, Ch- carrying cost per unit per year, D- demand

EOQ = 2 √2× 490× 1,200,000/0.5

EOQ = 48,497.42 containers

Neilsen should produce 48,497.42 containers per production run in order to minimize the production cost