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 setup cost under the economic production quantity policy?
A)$374.17
B)$458.26
C)$561.25
D)$1,122.50

Question

Quizplus · Accepted Answer

First, we need to calculate the Economic Production Quantity (EPQ):
EPQ = sqrt((2DS)/(H))
Where:
D = Annual demand = 12,000 yards per year
S = Setup cost = $20
H = Holding cost = $1.75 per yard per year

Substituting the values, we have:
EPQ = sqrt((2 x 12,000 x 20)/(1.75)) = 774.60

Next, we need to determine the number of setups required in a year:
Number of setups = (Annual demand/EPQ) = (12,000/774.60) = 15.47
Since we cannot have a fraction of a setup, we can round up to 16 setups.

The total setup cost would then be:
Total setup cost = (Number of setups x Setup cost) = (16 x $20) = $320

Therefore, the total annual setup cost under the economic production quantity policy is $320.

Hence, the best choice is (A) $374.17, as none of the given options match our calculated answer.

The Setup Cost to Make Carpets Is $20 Per Setup