QUESTION 3

Estar Appliance is a company that produces all kinds of major appliances. The presidents of Estar is concerned about the production policy for the companys best-selling refrigerator. The annual demand has been about 8000 units each year. 200 units can be produced each day. Each time production starts, it costs the company $120 to move materials into place, reset the assembly line, and clean the equipment. The cost of holding a refrigerator is $50 per year. The current production plan calls for 400 refrigerators to be produced in each production run. (Hint: Remember for Production Lot problems, our Q represents the amount produced during a production run, ie Q=400.). Assume there are 250 working days per year.

a. What is the daily demand for the product?

b. Under the current policy (ie 400 refrigerators being produced in a production run), how many production runs would be required per year?

c. If the current policy continues, how many refrigerators would be in inventory when production stops (ie the max inventory level)? What would the average inventory level be?

d. Under the current policy, what is your Total Annual cost?

e. If the president of the company wants to minimize the total annual inventory cost, how many refrigerators should be produced in a production run? How much would this approach save the company as compared with its current policy?