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a) Find the savings between the total cost of the current production run size and the optimal run size.
b) Find the additional savings in production costs and ordering and holding costs with the proposed project. Calculate the payback period for the investment in the project.
The anticipated annual demand for a chemical product distributed by the Seanna Chemical Group is 25,000 tons per year for the coming year. The company is currently producing the product with a capacity of 80,000 tons/year and a production line setup cost of $4,000/production run. Assume that the variable cost for the production is $400/ton and the unit holding cost is estimated as 25% of the variable cost. The company operates 250 working days per year.
a) The current production run size is 5,000 tons/run. How much can Seanna save by optimizing the ordering policy (that is, by using the EOQ model with a finite delivery rate)?
b) Suppose that Seanna recently implemented the optimal policy in part (a) and the Engineering Department is now proposing an investment of $2 million to renovate its facility for this product, which would reduce the variable cost to $380/ton and the line setup cost to $3,000/production run. What will be the annual savings that Seanna may achieve from this (in terms of the sum of production and fixed ordering and holding cost)? As the Chief Operating Officer of the company, would you consider this proposal?
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