MRP, EOQ, and JIT. Tech Works Corp. produces J-Pods, music players that can downloadthousands of songs. Tech Works forecasts that demand in 2014 will be 48,000 J-Pods. The variable productioncost of each J-Pod is $54. In its MRP system, due to the large $10,000 cost per setup, Tech Works plans toproduce J-Pods once a month in batches of 4,000 each. The carrying cost of a unit in inventory is $17 per year.
1. Using the MRP system, 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 theoptimal batch size to produce. (To use the EOQ model, Tech Works needs to treat the setup cost in thesame way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch sizeand number of batches. Round up the number of batches to the nearest whole number. What wouldbe 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 from its MRP system to a JIT system. This will result in producingJ-Pods in batch sizes of 600 J-Pods and will reduce obsolescence, improve quality, and resultin a higher selling price. The frequency of production batches will force Tech Works to reduce setuptime and will result in a reduction in setup cost. The new setup cost will be $500 per setup. What is theannual 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 disadvantagesof each?