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Optimal Economic Batch Quantity Guide

The document discusses the economic batch quantity model, which helps manufacturers determine the optimal batch size that minimizes total production costs. It considers factors like setup costs, manufacturing costs per item, storage costs per item, and total annual demand. The model shows that total annual costs are minimized when the marginal cost of increasing batch size equals the marginal cost of producing additional batches. An example is provided to demonstrate calculating the optimal batch size.

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Jamiya Nizar
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400 views5 pages

Optimal Economic Batch Quantity Guide

The document discusses the economic batch quantity model, which helps manufacturers determine the optimal batch size that minimizes total production costs. It considers factors like setup costs, manufacturing costs per item, storage costs per item, and total annual demand. The model shows that total annual costs are minimized when the marginal cost of increasing batch size equals the marginal cost of producing additional batches. An example is provided to demonstrate calculating the optimal batch size.

Uploaded by

Jamiya Nizar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Economic Batch Quantity

Economic Batch Quantity


A manufacturer can produce its product in
varying batch sizes
• 120 once a year
• 60 twice a year
• 10 each month … etc.
Elements to be considered
• k = Costs for storage one unit for a year
• f = Fixed setup cost per batch
• g = Mfg. cost per item
• M = Total number of items per year
• q = Number of items per batch 2
Economic Batch Quantity
Manufacturing cost per batch f  g q
Number of batches M
per year q
Total annual M f M
 f  g  q    g M
manufacturing cost q q
Inventory goes down linearly q to 0
• Average inventory q/2 units per year
• Storage costs k q
2 3
Economic Batch Quantity
Total production cost is sum of
• Manufacturing costs f M k q
T (q )   g M 
• Storage costs q 2

To minimize T(q) we solve T '(q) = 0 for q

2 f  M
q
k
4
Try It Out
Leo Lamps makes 100,000
lamps annually
• Costs Rs.1 to store a lamp for a year
• Costs Rs.500 to set up factory to produce a
batch
What is the optimum number of lamps to
produce in each batch?

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