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13 April, 21:01

A toy manufacturer estimates the demand for a game to be 2000 per year. Each game costs $5 to manufacture, plus setup costs of $500 for each production run. If a game can be stored for a year for a cost of $2, how many should be manufactured at a time and how many production runs should there be to minimize costs

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  1. 13 April, 21:08
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    Economic production run = 316. 2 units

    Production run t minimize cost = 6.32 runs

    Explanation:

    Economic batch quantity (EBQ) is also known as economic production run, It is the optimum production run that a manufacturer should operate to minize set up cost and carrying cost.

    Carrying cost i the cost of keeping inventor while set up cost is cost of getting machines ready for production

    It is calculated as follows:

    √2 * Co * D / Ch

    Where, Co - 500, D - 2000, Ch - 2

    = √ (2 * 500 * 2000/2)

    = 316. 2 units

    Units to be manufactured at a time 316. units

    Production run t minimize cost

    = annual demand / economic run

    =2000/316.

    =6.32 runs

    Economic production run = 316. 2 units

    Production run t minimize cost = 6.32 runs
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