4. Race One Motors is an Indonesian car manufacturer. At its largest manufacturi

Question

4. Race One Motors is an Indonesian car manufacturer. At its largest manufacturing facility, in Jakarta, the company produces subcomponents at a rate of 300 per day, and it uses these subcomponents at a rate of 12,500 per year (of 250 working days). Holding costs are $2 per item per year, and ordering (setup) costs are S30 per order. a) What is the economic production quantity? b) How many production runs per year will be made? c) What will be the maximum inventory level? d) What percentage of time will the facility be producing components? e) What is the annual cost of ordering and holding inventory?

Explanation / Answer

Annual demand, D = 12500

Daily demand rate, d = 12500/250 = 50

Daily production rate, p = 300 per day

Setup cost, S = $ 30

Holding cost, H = $ 2

a) Economic production quantity = SQRT(2DS/(H*(1-d/p))) = SQRT(2*12500*30/(2*(1-50/300))) = 671

b) Production runs per year = D/Q = 12500/671 = 18.63

c) Maximum inventory level = Q*(1-d/p) = 671*(1-50/300) = 559

d) Percentage of time facility will be producing components = d/p = 50/300 = 16.7%  

e) Annual cost of ordering and holding inventory = (D/Q)*S+(Q/2)*H*(1-d/p)

= (12500/671)*30+(671/2)*2*(1-50/300)

= $ 1,118

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