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Morrison Manufacturing produces casings for sewing machines: large and small. To produce the different casings, equipment must be set up. The setup cost per production run is $18,000 for either casing. The cost of carrying small casings in inventory is $6 per casing per year; the cost of large casings is $18 per unit per year. To satisfy demand, the company produces 2,400,000 small casings and 800,000 large casings. Required: 1. Compute the number of large casings that should be produced per setup to minimize total setup and carrying costs for this product. 2. Compute the setup, carrying, and total costs associated with the economic order quantity for the large casings.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 20, Problem 11E
Textbook Problem
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Morrison Manufacturing produces casings for sewing machines: large and small. To produce the different casings, equipment must be set up. The setup cost per production run is $18,000 for either casing. The cost of carrying small casings in inventory is $6 per casing per year; the cost of large casings is $18 per unit per year. To satisfy demand, the company produces 2,400,000 small casings and 800,000 large casings.

Required:

  1. 1. Compute the number of large casings that should be produced per setup to minimize total setup and carrying costs for this product.
  2. 2. Compute the setup, carrying, and total costs associated with the economic order quantity for the large casings.

1.

To determine

Compute the number of large cashing that the company should produce to minimize the total setup and carrying cost of the product (optimal usage).

Explanation of Solution

Economic order quantity (EOQ): Economic order quantity is ideal order quantity that the company should purchase the inventory with the ideal level. The economic order quantity (EOQ) approach assumes that some inventory must be held for future production. The main objective of the EOQ is to balance the ordering costs against the holding costs of inventory.

Compute the number of large cashing that the company should produce to minimize the total setup and carrying cost of the product (optimal usage) as follows:

Economic order quantity = 2×Annual demand (D)×Cost per o

2.

To determine

Calculate the setup, carrying and total cost associated with EOQ for large casing.

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Chapter 20 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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