Annual demand for sku1 and sku2 are 2 million units and 1 million units respectively. Tom estimates that current inventory carrying rate is 20%. Further, he estimates that the production cost of sku1 is $1.50/unit whereas the production cost of sku2 is only $0.30/unit. However, set up time for producing sku1 is lower (1 hr per set up) than the set up time for producing sku2 (2 hrs per set up). After conducting an analysis of set up times and processing times, Tom concludes that, in a year no more than 50hrs (budget for total set up hrs: 50 hrs x $50/hr = $2500) should be consumed in set up related activities.
Tom has recommended using the following production quantities:
Q1= 80,000 units for sku1, Q2= 80,000 units for sku2. For these production quantities, he concludes that total set up hrs used up annually are 25 hrs for sku1 annual production and 25 hrs for sku2 annual production.
You just have been hired as his consultant. Check the following deliverables:
Compute Economic Order Quantity(EOQ) for sku1 and sku2, and the total cost
TC*(sum of the total inventory and set up costs for sku1 and sku2) :
Q1* = ……. Q2*=………..TC*=………
Compute total cost for the order quantities recommended by Tom. TC(Tom)=………
Which one would you implement? Your answers Q1*, Q2* in a) above or
Tom’s answer Q1=Q2=80,000 units? Why?
Is there a third way, which is “better?” If no, stop here, if yes, compute your answers, modified Q1* and modified Q2* with your third way.
modifiedQ1*=…………; modifiedQ2*=… …..; modified TC*=……
Provide a solution for this in Excel document.
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