Comfy Wheels Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is $35. The cost of carrying seats in inventory is $6 per seat per year. The company produces 90,000 buses per year.
Total setup costs associated with the economic order quantity are
A)$4,610.
B)$3,073.
C)$3,750.
D)$1,537.

Question

Quizplus · Accepted Answer

The formula for economic order quantity (EOQ) is:

EOQ = sqrt((2DS)/H)

where:
D = annual demand (in units)
S = setup cost per order
H = holding cost per unit per year

To find the total setup cost, we need to find the setup cost per order:

Setup cost per order = D/Q * S

where Q is the order quantity.

The EOQ formula simplifies to:

EOQ = sqrt((2DS) / H)

= sqrt ((2 * 90,000 * 35 ) / 6)

= 1,261.5

Plugging this order quantity back into the setup cost formula:

Setup cost per order = D/Q * S

= 90,000/1,261.5 * 35

= $2,500

To find the total setup costs, we need to multiply the number of orders by the setup cost per order:

Total setup costs = 90,000 / 1,261.5 * 2,500

= $17,821.54

Therefore, the closest option to the total setup costs is option B) $3,073.

Comfy Wheels Bus Company Produces Buses