Tech Works Corp. produces J-Pods, music players that can download thousands of songs. Tech Works forecasts that demand in 2013 will be 48,000 J-Pods. The variable production cost of each J-Pod is $54. Due to the large $10,000 cost per setup, Tech Works plans to produce J-Pods once a month in batches of 4,000 each. The carrying cost of a unit in inventory is $17 per year.
Required
1. What is the annual cost of producing and carrying J-Pods in inventory? (Assume that, on average, half of the units produced in a month are in inventory.)
2. A new manager at Tech Works has suggested that the company use the EOQ model to determine the optimal batch size to produce. (To use the EOQ model, Tech Works needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size? Compare this cost to the cost calculated in requirement 1. Comment briefly.
3. Tech Works is also considering switching to a JIT system. This will result in producing J-Pods in batch sizes of 600 J-Pods and will reduce obsolescence, improve quality, and result in a higher selling price. The frequency of production batches will force Tech Works to reduce setup time and will result in a reduction in setup cost. The new setup cost will be $500 per setup. What is the annual cost of producing and carrying J-Pods in inventory under the JIT system?
4. Compare the models analyzed in the previous parts of the problem. What are the advantages and disadvantages of each?