Question

A small factory produces toilet paper. The annual demand is 360,000 units, and the company produces toilet paper in batches. On average, the company can produce 3,000 units a day during the production period. The cost to set up the production process is $100, and it costs the company $10 to carry 100 toilet paper units for one year. How many toilet paper units should the company produce in each batch? (Assume 360 days per year)

Answer 1

Answer:

26,833 units

Explanation:

Optimal production quantity is the quantity at which business incur minimum cost. This is the level of production per batch where the incur the lowest cost.

EOQ =  

C = Carrying cost = 10 / 100 = $0.1 per unit

S = Setup cost = $100

D =Annual Demand = 360,000

EOQ = $\sqrt{ \frac{2 X S X D}{C} }$

EOQ = $\sqrt{ \frac{2 X 100 X 360000}{0.1} }$

EOQ = 26,833 units