Question

Scenario 5 Guemmer Specialty Foods can produce their famous cherry pies at a rate of 1650 cases per day (this is the daily production rate). The firm distributes the pies to regional stores and restaurants at a steady rate of 250 cases per day (this is the daily demand rate). The cost of each production setup is $320. Annual holding costs are $11.50 per case per year. Annual demand is 62,500 cases. Assume 250 working days per year. Assume the POQ (Production Order Quantity) model is used by Guemmer Specialty Foods. Refer to Scenario 5. What is approximate annual inventory setup cost (rounded to the nearest dollar)?a.$320

b.$1,000
c.$9,878
d.$12.00

Answer 1

c) Annual set up cost= $9878.04

Step-by-step explanation:

Economic batch quantity (EBQ) is also known as economic production run, It is the optimum production run that a manufacturer should operate to minimize set up cost and carrying cost.

Carrying cost is the cost of keeping inventory while set up cost is cost of getting machines ready for production

Annual inventory cost = = Set up cost per run× Annul demand / EBQ

Annual demand / the economic production run(EBQ)

It is calculated as follows:

Economic batch quantity =√2× Co× D / Ch(1-D/P)

Where ,

D - annual demand - 62,500

Ch -holding cost per unit per annum - $11.50

Co- set up cost - $320

Production rate = 1650 units per day × 250 days =412,500 units

Economic batch quantity

= √(2× 320× 62,500) / (11.50× (1- 62500/412500) )

=2024.69 units

Annual set up cost

= Set up cost per run × Annul demand / EBQ

= $320× 62,500/2024.69

Annual set up cost= $9878.04