Race One Motors is an Indonesian car manufacturer. At its largest manufacturing
ID: 368903 • Letter: R
Question
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 $30 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? 4.Explanation / Answer
Annual demand of subcomponent = D = 12500
Holding cost = Ch = $2 per item per year
Ordering cost = Co = $ 30 per order
Daily production capacity = p = 300
Daily demand = d = 12500 / 250 = 50
Economic Production Quantity ( EPQ)
= Square root ( 2 x Co x D/ 2 x ( 1 – d/p))
= Square root ( 2 x 30 x 12500 / 2 x ( 1 – 50/300))
= Square root ( 2 x 30 x 12500 / 2 x 0.833)
= 670.95 ( 671 rounded to nearest whole number )
ECONOMIC PRODUCTION QUANTITY = 671 UNITS
Number of production runs per year will be made
= Annual demand / Economic Production quantity
= 12500/ 671
= 18.63
NUMBER OF PRODUCTION RUN PER YEAR = 18.63
Maximum inventory level
= EPQ x ( 1 – d/p)
= 671 x ( 1 – 50/300)
= 671 x 0.833
= 558.94 ( 559 rounded to nearest whole number )
MAXIMUM INVENTORY LEVEL = 559
Percentage of time facility will be producing
= (Number of production days/ 250 working days) x 100
= ( Annual demand / (Daily production capacity x 250 working days) ) x 100
= ( 12500 / ( 300 x 250)) x 100
= 16.66%
PERCENTAGE OF TIME FACILITY WILL BE PRODUCING = 16.66%
Annual cost of ordering
= Ordering cost x Number of orders
= Co x Annual demand / EPQ
= 30 X 12500/ 671
= $558.86
Annual holding cost
= Annual unit holding cost x Average inventory
= Annual inventory holding cost x EPQ x ( 1 – d/p)/ 2
= $2 x 671 x ( 1 – 50 / 300)/ 2
= 671 x 0.833
= $558.94
Annual cost of ordering and holding inventory = $558.86 + $558.94 = $1117.80
ANNUAL COST OF ORDERING AND HOLDING INVENTORY = $1117.80
ECONOMIC PRODUCTION QUANTITY = 671 UNITS
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