Figure 24-5
Big 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 £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year.
-Refer to Figure 24-5. The number of seats that should be produced per setup in order to minimize the total setup and carrying costs is
A)2,828 seats.
B)1,265 seats.
C)894 seats.
D)566 seats.

Question

Quizplus · Accepted Answer

To find the number of seats that should be produced per setup in order to minimize the total setup and carrying costs, we need to use the Economic Order Quantity (EOQ) formula:
EOQ = √((2DS)/H)
where D = demand per year, S = setup cost per frame, and H = carrying cost per unit per year.

Plugging in the given values:
D = 100,000 buses x 50 seats per bus = 5,000,000 seats per year
S = £40 per frame ÷ 50 seats per frame = £0.80 per seat
H = £5 per seat per year

EOQ = √((2 x 5,000,000 x 0.80)/5) = 1,264.91

Rounding up, the best choice is 1,265 seats per setup, which minimizes the total setup and carrying costs.

Figure 24-5 Big Bus Company Produces Buses. in Order to Produce the Produce