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The demand for an item is uniform at a rate of 25 units p.m. The fixed cost is rupees 30 each time a production is made. The production cost is rupees 3 per item p.m. determine how often one should make a production run and of what size.?
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The demand for an item is uniform at a rate of 25 units p.m. The fixed...
Solution:
Given data:
- Demand rate = 25 units p.m.
- Fixed cost per production run = Rs. 30
- Production cost per item p.m. = Rs. 3
To determine the optimal production run size and frequency, we need to use the Economic Order Quantity (EOQ) model. The formula for EOQ is as follows:
EOQ = √((2DS)/H)
where,
D = demand rate per period
S = setup or fixed cost per production run
H = holding or carrying cost per unit per period
1. Calculate the annual demand
Annual demand = 25 units/month x 12 months = 300 units
2. Calculate the holding cost
Assuming a 20% holding cost per unit per year, the holding cost per unit per month would be:
H = 0.20/12 = 0.0167
3. Calculate the EOQ
EOQ = √((2 x 300 x 30)/0.0167) = 759.88 units (rounding off to 760 units)
4. Determine the production frequency
Production frequency = (Annual demand/EOQ) = 300/760 = 0.39
This means that one production run should be made every 2.56 months (1/0.39).
5. Determine the production run size
Production run size = EOQ = 760 units
Therefore, the optimal production run size is 760 units, and it should be made every 2.56 months. This will minimize the total inventory cost by balancing the holding cost and setup cost.
Given data:
- Demand rate = 25 units p.m.
- Fixed cost per production run = Rs. 30
- Production cost per item p.m. = Rs. 3
To determine the optimal production run size and frequency, we need to use the Economic Order Quantity (EOQ) model. The formula for EOQ is as follows:
EOQ = √((2DS)/H)
where,
D = demand rate per period
S = setup or fixed cost per production run
H = holding or carrying cost per unit per period
1. Calculate the annual demand
Annual demand = 25 units/month x 12 months = 300 units
2. Calculate the holding cost
Assuming a 20% holding cost per unit per year, the holding cost per unit per month would be:
H = 0.20/12 = 0.0167
3. Calculate the EOQ
EOQ = √((2 x 300 x 30)/0.0167) = 759.88 units (rounding off to 760 units)
4. Determine the production frequency
Production frequency = (Annual demand/EOQ) = 300/760 = 0.39
This means that one production run should be made every 2.56 months (1/0.39).
5. Determine the production run size
Production run size = EOQ = 760 units
Therefore, the optimal production run size is 760 units, and it should be made every 2.56 months. This will minimize the total inventory cost by balancing the holding cost and setup cost.
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The demand for an item is uniform at a rate of 25 units p.m. The fixed cost is rupees 30 each time a production is made. The production cost is rupees 3 per item p.m. determine how often one should make a production run and of what size.?
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The demand for an item is uniform at a rate of 25 units p.m. The fixed cost is rupees 30 each time a production is made. The production cost is rupees 3 per item p.m. determine how often one should make a production run and of what size.? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about The demand for an item is uniform at a rate of 25 units p.m. The fixed cost is rupees 30 each time a production is made. The production cost is rupees 3 per item p.m. determine how often one should make a production run and of what size.? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The demand for an item is uniform at a rate of 25 units p.m. The fixed cost is rupees 30 each time a production is made. The production cost is rupees 3 per item p.m. determine how often one should make a production run and of what size.?.
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