A producer of electronic parts wants to take account of both production rate and demand rate in deciding on its lot sizes. A particular $50 part can be produced at a rate of 1000 units per month, and the demand rate is 200 units per month. The firm uses a carrying charge of 24 percent a year, and the setup cost is $200 each time the part is produced.
a. What lot size should be produced?
b. If the production rate is ignored, what would the lot size be? How much does this smaller lot size cost the firm on an annual basis?
c. Draw a graph of on-hand inventory versus time.