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. Total setup costs associated with the economic order quantity are
A)£3,953.
B)£3,612.
C)£3,162.
D)£1,778.

Question

Quizplus · Accepted Answer

The economic order quantity (EOQ) can be calculated using the formula:
EOQ = sqrt((2DS)/H)
Where:
D = annual demand (100,000 seats)
S = setup cost per frame (£40)
H = holding cost per seat per year (£5)
Plugging in these values, we get:
EOQ = sqrt((2 x 100,000 x 40)/5) = 632.46
Total setup costs associated with the EOQ can be found by multiplying the number of setup orders per year by the setup cost per frame:
Total setup costs = (annual demand/EOQ) x setup cost per frame x EOQ/2
Total setup costs = (100,000/632.46) x £40 x 632.46/2 = £3,162.24, which rounds to £3,162. Therefore, the best choice is C.

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