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Suppose that a manufacturer has one major buyer who orders its EOQ of 20,000 units about once per month. Annual demand is 240,000 units. The manufacturer has a setup cost of $180 per order and a holding cost per unit of $10. If the manufacturer practices lot-for-lot production, what would be the manufacturer’s annual holding and setup cost?
a. $1
b. $20,000
c. $2,160
d. $102,160
e $40,000

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Answer:

Total cost $2160

Explanation:

Lot for lot production means the manufacturer produces the items only when it recieves the order. He doesn't make anything extra for the inventory. Even though he is certain that he will get the order, he will start manufacturing only when he recieves the order.

So Holding cost = 0 (since no inventory)

Set up cost for one time = $ 180

No of orders in a year = 12 (once a month)

Total set up cost = 18*12 = 2160$

Total cost = 2160 + 0 = $2160

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