Question

XYZ Ltd produces a product for which the annual demand is 10,000 units. Production averages 100 units per day, while demand is 40 units per day. Holding costs are $2.00 per unit per year, and setup cost is $200.00. If the firm wishes to produce this product in economic batches, what size batch should be used?

Answer 1

Answer: Batch size to be used  =Economic batch size of 2,236 units

Explanation:

From the question, we have that

Annual demand (D) = 10,000 units

Setup cost (S) = $200

Holding cost (H) = $2 per unit per year

Daily production (p) = 100 units per day

Daily Demand (d) = 40 units per day

Therefore Economic batch size, Q will be calculated as

Q =$\sqrt{2 x D x S / H x ( 1-d/p }$

Q= $\sqrt{2 x 10,000 x 200 / 2 x ( 40/100)}$

Q=$\sqrt{4,000,000/0.8 }$

Q=$\sqrt{5,000,000}$

Q=2,236.067 rounded up to 2,236

Economic batch size =2,236 units