The annual demand of an appliance company is 8000 units. The production capacity is 200 units per day. Each time production starts, it costs the company $120 to move materials into place, reset the assembly line, and clean the equipment. The holding cost of a refrigerator is $50 per year. The current production plan calls for 400 refrigerators to be produced in each production run. Assume 250 working days per year. a) Compute the daily demand of this product. b) If the company were to continue to produce 400 units each time production starts, how many days would production continue? c) How many productions runs per year would be required? What would the annual cost be? d) how many refrigerators would be in the inventory when production stops? What would be the average inventory level in this case? e) If the company produced 400 refrigerators at a time, what would the total annual set up cost and holding cost be?

Answer and Explanation:

The computation is shown below:

a. The daily demand for this product is

Daily demand = Annual demand ÷ Working days per year

= 8,000 ÷ 250

= 32 units

b. The number of days for continuing the production is

= current production plan calls ÷ production capacity

= 400 ÷ 200

= 2 days

c. The production runs per year would be required is

Number of production runs per year = Annual demand ÷ Production quantity

= 8,000 ÷ 400

= 20

d. The number of refrigerators and the average inventory in case of production stops is

But before that we have to determine the maximum inventory level which is

= Q × (1 - d ÷ p)

where,

Q = Production quantity

d = daily demand

p = production capacity

So, the maximum inventory level is

= 400 × (1 - 32 ÷ 300)

= 400 × (1 - 0.16)

= 400 × 0.84

= 336 refrigerators

Now the average inventory is

= Maximyum inventory ÷ 2

= 336 refrigerators ÷ 2

= 168 refrigerators

e. Total annual set up cost and holding cost is

Annual set up cost = Number of production runs per year × Set up cost

= 20 × $120

= $2,400

Annual holding cost = Average inventory level × Holding cost

= 168 × $50

= $8,400

Total annual set up cost and holding cost is

= $2,400 + $8,400

= $10,800

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