Question

A supplier to Ford stamps out parts using a press. Changing a part type requires the supplier to change the die on the press. This changeover currently takes four hours. The supplier estimates that each hour spent on the changeover costs $250. Demand for parts is 1,000 per month. Each part costs the supplier $100, and the supplier incurs an annual holding cost of 25%.
Required:
A) Determine the optimal production batch size for the supplier.

Answer 1

Answer:

The optimal production batch size for the supplier is 980 units.

Explanation:

In order to calcuate the optimal production batch size for the supplier we have to use the following formula:

optimal production batch size= $\sqrt$(2×Annual Demand×setup cost)

                                                                 Holding Cost

optimal production batch size=$\sqrt$ (2×(1,000×12)×($250×4)

                                                                  ($100×25%)

optimal production batch size=$\sqrt$(2×12,000×$1,000)

                                                               $25

optimal production batch size= 980 units