Please show your all work and calculations. Thanks! 1.A company has an annual re
ID: 2555878 • Letter: P
Question
Please show your all work and calculations. Thanks!
1.A company has an annual requirement for 205,000 parts, which have a WIP cost of $82 each at the time of this processing. The parts require an outsourced operation which has a setup cost o $6,600. Each part occupies 1.2 sqft of floor space in the factory, where the space cost is $21 per sqft. The company uses 22.5% as MARR. Calculate the economic order quantity and the time between production runs for the outsourced operation. Also calculate the combined setup amd storage costs for a year, operating at the economic order quantity. Plot the inventory level vs time for a reasonable number of full inventory cycles. If the company decides to meet the annual volume requirement of 250,000 by placing an order for the outsourcing operation every 3 months, what would be the effect on the combined setup and storage costs for the year?
Explanation / Answer
Annual Requirement=205000
Assume Economic Order quantity=Q
Number of Set ups=205000/Q
Total Cost of Set up=$6600*(205000/Q)
Average Inventory=Q/2
Space cost per part for keeping inventory=$21*1.2=$25.2
Total space cost=(Q/2)*25.2
Cost of inventory=$82*(Q/2)
MARR=22.5%=0.225
Cost of keeping inventory=82*(Q/2)*0.225
Total Carrying cost of inventory=(Q/2)*25.2)+(82*(Q/2)*0.225)
Total Set up Cost=6600*(205000/Q)
For Minimization of total cost:
Total Set up cost=Total carrying cost
6600*(205000/Q)=(Q/2)*(25.2+(82*0.225)=(Q/2)*43.65
(Q^2)=(2*6600*205000)/43.65=61993127)
Q=Square Root(61993127)= 7873.57144
Q=7874(Rounded to whole number)
Economic Order Quantity=7874
Number of Production Runs=205000/7874=26
Time between Production runs=365/26=14 days
Combined set up and storage cost=(6600*(205000/Q))+((Q/2)*43.65
Combined set up and storage cost=6600*26+(7874/2)*43.65=$343,450
If it is decided to place order every three months:
Order Quantity Q=205000/4=51250
Number of runs=205000/51250=4
Combined Set up and Storage cost=(6600*4)+(51250/2)*43.65)
Combined Set up and Storage cost= $ 1,144,931
Combined Set up and storage cost will increase by(1144931-343450)= $ 801,481