Question

Suppose that a company needs 1,500,000 items during a year and that preparation for each production run costs $900. Suppose also that it costs $22 to produce each item and $3 per year to store an item. Use the inventory cost model to find the number of items in each production run so that the total costs of production and storage are minimized.

Answer 1

Answer:

30,000 units

Explanation:

According to the inventory cost model, the production run size that minimizes costs is given by:

$P = \sqrt{\frac{2*D*S}{H}}$

Where D is the annual demand (1,500,000 items), S is the cost of each production run ($900) and H is the holding cost per unit ($3). Applying the given data:

$P = \sqrt{\frac{2*1,500,000*900}{3}}\\P=30,000\ units$

Each production run should consist of 30,000 units.