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2) Annual demand for a make-to-stock product is 40,000 units. Each unit costs $12, and the annual holding cost rate is 15%. Setup time to change over equipment for this product is 2.0 hours and downtime cost of the equipment $180/hr. Determine (a) economic order quantity (b) total inventory costs.

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Zviko

Answer:

a.Economic Order Quantity =  4,000 units

b.Total Inventory Cost =  $7,200

Explanation:

Economic Order Quantity = √(2×Annual Demand×Set-up Cost per Order) / Holding Cost per Unit

                                          = √(2×40,000×$180×2)/($12×15%)

                                          =  √16,000,000

                                          =  4,000

Total Inventory Cost = Set Up Cost + Holding Cost

                                  = ((40,000/4,000)×($180×2))+((4,000/2)×($12×15%))

                                  = $3,600 + $3,600

                                  = $7,200

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