Global Tunes Corp. produces J-Pods, music players that can download thousands of songs Global Tunes forecasts that demand in 2014 will be 43,200 J-Pods. The variable production cost of eachJ-Pod is $52. In its MRP system, due to the large $91,200 cost per setup, Global Tunes plans to produceJ-Pods once a month in batches of 3,600 each. The carrying cost of a unit in inventory is $19 per year Requirement 1. Using the MRP system, what is the annual cost of producing and carrying J-Pods ininventory? (Assume that, on average, half of the units produced in a month are in inventory.) Begin by determining the formula, then calculate the annual cost of producing and carrying J-Pods ininventory using an MRP system Cost of producing and carrying Requirement 2, A new manager at Global Tunes Corp. has suggested that the company use the E? model to determine the optimal batch size to produce. (To use the EOQ model, Global Tunes Corp. needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size? Compare this cost to the cost calculated in requirement 1. Comment briefly The optimal batch size is__J-pods. Round your final answer to the nearest whole number.) batches. (Round up the number of batches to the The optimal number of batches that would be produced is nearest whole number.) Calculate the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size Cost of producing -and carrying The costs of producing and carrying J-Pods in inventory (INCREASE/DECREASE). The (INCREASE/DECREASE) The (CARRYING COST/DEMAND/ORDERING COST/SQUARE ROOT) in the EOQ formula reduces the effect of errors in computing optimal batch size Requirement 3. Global Tunes Corp. is also considering switching from an MRP system to a JIT system. This will result in producing J-Pods in batch sizes of 300 J-Pods and will reduce obsolescence, improve quality, and result in a higher selling price. The frequency of production batches will force Global Tunes Corp. to reduce setup time and will result in a reduction in setup cost. The new setup cost will be $220 per setup. What is the annual cost of producing and carrying J-Pods in inventory under the JIT system? Calculate the annual cost of producing and carrying J-Pods in inventory under the JIT systerm Cost of producing and carrying The JIT model resulted in the (HIGHEST/LOWEST) costs because (CARRYING COSTS/CARRYING COSTS AND SETUP COSTS/TOTAL SETUP COSTS/TOTAL VARIABLE PRODUCTION COSTS) were lower than the EOQ model The EOQ model, in this case, limits production to once every (FIVE/FOUR) months. This (WOULD/WOULD NOT) allow managers to react quickly to changing market demand or economic conditions. The (EOQ/JIT/MRP) model provides management with much more flexibility
Requirement 1) under MRP system
Annual cost of producing and carrying j- pods in inventory
= variable production cost + setup cost + carrying cost
= $52 × 43,200 + ($91,200 ×12months) + [19 ×(3600÷2)]
= $2,246,400 + 1,094,400 + 34,200
= $3,375,000
Requirement 2) using an EOQ model to determine batch size
EOQ = ?2DP/C = ?2 × 43,200 × 91,200/$19
= 20,365 j- pods per batch
The optimal batch size is 20,365 j- pods.
The optimal number of batches that would produced is 3 batches
Note- 43200/20365 = 2.12 batches per year. Rounding this to nearest whole number yield 3 batches per year.
Annual cost of producing and carrying j- pods in inventory
= variable production cost + setup cost + carrying cost
= $52 × 43,200 + ($91,200 ×3 ) + [19 ×(20,365÷2)]
= $2,246,400 + 273,600 + 193,468
= $2,713,468
Requirement 3) Under JIT system
Annual cost of producing and carrying j- pods in inventory
= variable production cost + setup cost + carrying cost
= $52 × 43,200 + ($220 ×144) + [19 ×(300÷2)]
= $2,246,400 + 31,680 + 2,850
= $2,280,930
Note- 43,200/300 = 144 set up per year.
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