Larry\'s Cookies is well known for producing only one type of handmade cookie an

Question

Larry's Cookies is well known for producing only one type of handmade cookie and the unit price is $40. The annual demand is 5,000 cookies on average and the expected inventory holding cost is 10% of the cost of each cookie. On average, Larry's Cookies can produce 1,000 chocolates per month. Because of difficulties in preparing kitchen tools, cookies are produced in batch. The cost to set up the production process is $500. The unit production cost is $10. How many cookies should the company produce in each batch?

Explanation / Answer

Economic batch quantity = ((2*A*O)/C)1/2

A= Annual supply = 5000 cookies

O= Setup cost = 500 $

C= Inventory handling costs = .10*10 = 1 $

Economic batch quantity = ((2*5000*500)/1)1/2 = 2236.06 = 2236 units

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