Monthly usage rate for a certain part is 15,000 units. The part is produced in batches and its manufacturing costs are estimated to be $7.40. Holding cost is 20% of piece cost. Currently the production equipment used to produce this part is also used to produce 19 other parts with similar usage and cost data (assume the data to be identical for purposes of this problem). Changeover time between batches of the different parts is now 4.0 hours, and cost of downtime on the equipment is $275/hr. A proposal has been submitted to fabricate a fast-acting slide mechanism that will permit the changeovers to be completed in just 5.0 minutes. Cost to fabricate and install the slide mechanism is $150,000.
(a) Is this cost justified by the savings in total annual inventory cost that would be achieved by reducing the economic batch quantity from its current value based on a 4-hour setup to the new value based on a 5-minute setup?
(b) How many months of savings are required to pay off the $150,000 investment?