An operation manager of a chemical manufacturing plant must determine the lot si
ID: 356014 • Letter: A
Question
An operation manager of a chemical manufacturing plant must determine the lot size for a chemical that has a steady demand of 1,450 litres per day. The production rate is 6,850 litres per day, setup cost is $200, annual holding cost is $0.21 per litre, and the plant operates 350 days per year.
As part of its new JIT program, the company has signed a long-term contract with its customers and the company will take orders electronically for the engines. The lot size (production order quantity) will drop to 20,000 litres. Determine the new setup cost per order and the number of orders (setups). What is the total annual cost of managing the inventory with the new policy? What is the setup time in hours, based on a $25 per hour setup labour cost with the new policy?
Explanation / Answer
Present EOQ = [ 2x 1450x350 x250/0.21 ]0.5 = 34761
No. of orders = 1450x350 / 34761 = 14.59 =15
Under new JIT program, lot size will be 20000.
The new set up cost = (20000)2 x 0.21 / 2x1450x350 = 82.75
No. of orders = 1450x350 /20000 = 25.37 =26
Set up time = 82.75 /25 = 3.31 hrs.
Annual cost = Inventory holding cost + Ordering cost
= 0.21 x Avg inventory + 26x 82.75
= 0.21 x0.5 x1450 x350 + 2151.5
= 53287.5+2151.5 = 55439
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