Electrico is a company that produces all kinds of major appliances. Gabby Thomas

Question

Electrico is a company that produces all kinds of major appliances. Gabby Thomas, the president of Electrico, is concerned about the production policy for the company’s best- selling washing machine. The demand of washing machine is 625 units each month, and this demand is constant throughout the year. The production capacity is 300 units per day. Each time production starts, it costs the company $ 240 to move materials into place, reset the assembly line, and clean the equipment. The holding cost of each washing machine is $ 100 per year. The current production plan calls for 600 washing machines to be produced in each production run. Assume there are 250 working days per year. If Gabby Thomas wants to minimize the total annual inventory cost, how many washing machines should be produced in each production run? How much would this save the company in inventory costs compared to the current policy of producing 600 washing machines in each production run?

Explanation / Answer

Annual demand (D) = 625*12 = 7500

Set up cost (S) = 240

Holding cost (H) = 100

production rate (p) = 300

usage rate (u) = 7500/250 = 30

Economic order qty (EOQ) = sqrt(2*D*S/H)*sqrt(p/(p-u)) = sqrt(2*7500*240/100)*sqrt(300/(300-30)) = 200

Imax = EOQ*(p-u)/ = 200*(300-30)/300 = 180

Total cost = Imax/2*H + D/EOQ*S = 180/2*100 + 7500/200*240 = 18000

Now, current EOQ = 600

Imax = 600*(300-30)/300 = 540

Total cost = 540/2*100 + 7500/600*240 = 30000

So, Total saving of 30000 - 18000 = 12000

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