Answer:
The answer for each requirement is given separately below.
Explanation:
What is the economic production quantity (EPQ)?
EPQ = ((Annual Requirement * setup cost *2)/Carrying cost per unit)^(1/2)
= ((30,000 * 50 *2)/3^(1/2)
= 1000 Units
a. What is the average inventory level for this optimum production quantity?
Average Inventory level = EPQ/2 = 500 units
b. How many production setups would there be in a year?
Production setups = Annual Usage /EPQ = 30 set ups
C. What is the optimal length of production run in days
length of production = Total Requirement/production per day
= 30,000/275
=110 days approx
d. What would be the savings in annual inventory Cost if setup costs can be reduced to US$40 per setup?
If set up cost reduce to $40 than EPQ = 895
So Set up cost = 30,000/ 895 * 40 = 1,360
Carrying cost = 883/2 *3 = 1,325
Total Cost = $ 2,685 -A
If set up cost $50 than EPQ = 1000
So Set up cost = 30,000/ 1000 * 50 = 1,500
Carrying cost = 1000/2 *3 = 1,500
Total Cost = $ 3,000- B
Saving = B-A = 315 Dollars
