1. The following data is available on four products that are produced on a single machine.
Product/ Annual Demand /AnnualProduction Rate/Unit Cost ($)/Set-up Cost($)/Set-up Time(Days)
1 13000 26000 20 400 2
2 75 1200 14 1000 1
3 4300 40000 20 400 2
4 120 400 2.5 1000 1
Suppose the annual holding cost rate is 24%. Assume a 30 days per month or 360 days per year in your calculations.
a) Find the optimal time between production of each product, their optimal production quantities and the average annual total cost.
b) Suppose that through upgrading the existing machine, Set-up times can be eliminated; however, Set-up costs which are mainly due to instrument changes hold as before. What is the maximum investment the company is willing to make (if any) on this upgrade? (In all your financial analysis, assume that relevant cash flows continue in perpetuity, the nominal cost of capital is 36% per year compounding monthly)