MacroHard Corp. produces J-Pods, music players that can download thousands of songs. MacroHard forecasts that demand in 2013 will be 48,000 J-Pods. The variable production cost of each J-Pod is $50. Due to the large $50,000 cost per setup, MacroHard plans to produce J-Pods once a month in batches of 4,000 each. The carrying cost of a unit in inventory is $20 per year.
1. Using an MRP system, what is the annual cost of producing and carrying J-Pods in inventory? (Assume that, on average, half of the units produced in a month are in inventory.)
2. A new manager at MacroHard has suggested that the company use the EOQ model to determine the optimal batch size to produce. (To use the EOQ model, MacroHard needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size?
3. MacroHard is also considering switching from an MRP system to a JIT system. This will result in producing to demand in batch sizes of 500 J-Pods. The frequency of production batches will force MacroHard to reduce setup time and will result in a reduction in setup cost.
The new setup cost will be $5,000 per setup. What is the annual cost of producing and carrying J-Pods in inventory under the JIT system?
4. Compare the models analyzed in the previous parts of the problem. What are the advantages and disadvantages of each?