A company produces a prodcut that requires part X in its con

A company produces a prodcut that requires part X in its construction. The company plans on building 2500 units of the product over the next year, and therefore, has a need for 2500 units of part X. The cost of placing an order for part X is $15, and each unit cost $4 per year to carry in inventory. Each part X has a cost of $30.

A. What is the EOQ?

B. The company has the capabilty of producing part x internally. It estimates a setup cost of $250 per production run. The production rate would be 4800 units of part X per year. What is the economic (run) production size? (One year = 250 days)

Please show your work

Solution

EOQ = SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order)

EOQ = SQRT (2 x 2500 x 15 / 4) = 197 units

Economic production size = SQRT (2 x set-up cost x demand rate / carrying cost x (1 – demand rate / production rate))

Demand rate / Production rate = 2500 / 4800 = 0.521

Economic production size = SQRT (2 x 250 x 2500 / 4 x (1 – 0.521)) = 808 units