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#3 Inter: Question of the day (Group 1)
Costing
A company has obtained an order to supply 48000 bearings per year from a concern. On a steady basis, it is estimated that it costs Rs. 0.20 as inventory holding cost per bearing per month and the set-up cost per run of bearing manufacture is Rs.384. Compute (i) optimum run size and number of runs for bearing manufacture. (ii)interval between two consecutive runs. (iii) extra costs to be incurred, if company adopts a policy to manufacture 8000 bearings per run as compared to optimum run Size. Note: A year is assumed to have 365 days
Answers (7)
1 - EBQ = â?? 2*48000*384/2.4 = 3919.18 ~ 3920 2- no of batch = 48,000/3920 = 12.2449 - interval = 365 / 12.2449 = 29.81 Days 3 - cost at EBQ - set up cost - 12.2449 * 384 = 4702.04 - carring cost - 1/2 * 3920 * 2.4 = 4704 Total cost - 9406.04 Cost at 8000 - setup cost - 6*384 = 2304 - carring cost - 1/2 * 8,000*2.4=9600 Total cost 11904 Extra cost - 2498
(Updated)
Answer (i) Optimum batch size or Economic Batch Quantity (EBQ): EBQ = sqrt [(2DS)/C] = sqrt (2x48,000x384)/2.4= 3919.18 or 3,920 units Number of Optimum runs = 48,000/3,920 = 12.245 or 13 runs (ii) Interval between 2 runs (in days) = 365 days/13 = 28 days Or 365/12.24=29.82 days (iii) If 8,000 bearings are manufactures in a run: Total cost = Set-up cost + Inventory holding cost =384�?(48,000�·8,000) + (8,000/2)x2.4 = 2304+9,600 = 11,904 Extra cost = (11,904 - 9,406*) =Rs.2,498/- OR Extra cost = ` (11,904 - 9,696*) = Rs.2,208/- * Minimum Inventory Cost = Average Inventory �? Inventory Carrying Cost per unit per annum = (3,920 units/2) (0.2x12 months) = 1,960 x 2.4 = Rs.4,704 Total cost = Set-up cost + Inventory holding cost = (12.245x384) + 4704 = Rs.9,406 (approx.) OR Total cost = Set-up cost + Inventory holding cost = (13x384) + 4704 = Rs.9,696 (approx.) Opinion (if asked in question) (a) Company should run at optimum batch size i.e. 3,920 Units to make savings : Rs.2,498 or 2208. (b) Run size should match with the Economic production run of bearing manufacture. (c) Consider the costs related to setting up the production process and the costs of holding inventory to make decisions
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