The setup cost to make carpets is $20 per setup.The holding cost is $1.75 per yard per year,and the annual demand is 12,000 yards of carpet per year.The manufacturing facility operates 300 days,and 120 yards of the carpet are produced per day.What is the total annual holding cost under the economic production quantity policy?
A)$374.17
B)$458.26
C)$561.25
D)$1,122.50

Question

Quizplus · Accepted Answer

The economic production quantity (EPQ) is the optimal quantity of a product to produce at one time in order to minimize the total inventory costs. The EPQ is given by the following formula:EPQ = √(2*D*S)/Hwhere:D = annual demandS = setup costH = holding cost per unit per yearIn this case, the annual demand is 12,000 yards, the setup cost is $20, and the holding cost is $1.75 per yard per year. Therefore, the EPQ is:EPQ = √(2*12,000*$20)/$1.75 = 2,000 yardsThe total annual holding cost is then given by the following formula:Total holding cost = H*Q/2where:H = holding cost per unit per yearQ = EPQIn this case, the holding cost is $1.75 per yard per year and the EPQ is 2,000 yards. Therefore, the total annual holding cost is:Total holding cost = $1.75*2,000/2 = $1,750Therefore, the correct answer is A) $374.17.

The Setup Cost to Make Carpets Is $20 Per Setup