Answer:
c) Annual set up cost= $9878.04
Explanation:
<em>Economic batch quantity (EBQ) is also known as economic production run, It is the optimum production run that a manufacturer should operate to minimize set up cost and carrying cost. </em>
<em>Carrying cost is the cost of keeping inventory while set up cost is cost of getting machines ready for production</em>
Annual inventory cost = = Set up cost per run× Annul demand / EBQ
<em>Annual demand / the economic production run(EBQ)</em>
It is calculated as follows:
Economic batch quantity =√2× Co× D / Ch(1-D/P)
Where ,
D - annual demand - 62,500
Ch -holding cost per unit per annum - $11.50
Co- set up cost - $320
Production rate = 1650 units per day × 250 days =412,500 units
<em>Economic batch quantity</em>
= √(2× 320× 62,500) / (11.50× (1- 62500/412500) )
=2024.69 units
<em>Annual set up cost</em>
= Set up cost per run × Annul demand / EBQ
= $320× 62,500/2024.69
Annual set up cost= $9878.04
