A manufacturer of greeting cards must determine the size of production runs for a certain popular line of cards. The demand for these cards has been a fairly steady 2 million per year, and the manufacturer is currently producing the cards in batch sizes of 50,000. The cost of setting up for each production run is $400.

Assume that for each card the material cost is 35 cents, the labor cost is 15 cents, and the distribution cost is 5 cents. The accounting department of the firm has established an interest rate to represent the opportunity cost of alternative investment and storage costs at 20 percent of the value of each card.

a. What is the optimal value of the EOQ for this line of greeting cards?

b. Determine the additional annual cost resulting from using the wrong production lot size.