Question

A supplier to Ford stamps out parts using a press. Changing a part type requires the supplier to change the die on the press. This changeover currently takes four hours. The supplier estimates that each hour spent on the changeover costs $250. Demand for parts is 1,000 per month. Each part costs the supplier $100, and the supplier incurs an annual holding cost of 25%.

Required:
A) Determine the optimal production batch size for the supplier.

Answer 1

The optimal production batch size for the supplier is 980 units.

Step-by-step explanation:

In order to calcuate the optimal production batch size for the supplier we have to use the following formula:

optimal production batch size=
`\sqrt`(2×Annual Demand×setup cost)

Holding Cost

optimal production batch size=
`\sqrt` (2×(1,000×12)×($250×4)

($100×25%)

optimal production batch size=
`\sqrt`(2×12,000×$1,000)

$25

optimal production batch size= 980 units