Reference no: EM132790738

Cost Savings From Smaller Inventory. Automated Assembly Company maintains a W1P inventory at each of 15 work stations,, and th e average size of the inventory is 200 units per station. Th e physical flow of units into and out of each W1P location is first-in, first-out. The total number of instances in which some work station goes out of its control limits is expected to be 100 during the coming year. In 80% of these instances, the out-of-control condition is expected to be discovered immediately by the operator at that station; in the other 20% of these instances, a defect will enter 10% of the units produced. These defective units enter W1P between stations, where they will be discovered by the next station's operator. Every out-of-control condition is corrected as soon as it is discovered. The average cost of a unit in WIPis $40, and the average loss from an out-of-control condition is $20 per defective unit produced. The annual cost of carrying W1P is 33% of the cost of the inventory.

Management plans to reduce the number of units held at every work station .The rate of final output will be unchanged, and no other changes will be made in the system.

Required:

Problem (1) Calculate the expected carrying cost savings from the change planned by the management.

Problem (2) Calculate the expected savings in cost of defects if the changes are implemented.