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22 July, 08:34

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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  1. 22 July, 08:48
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    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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