Determination of economic Batch Quantity

Need for Determining:

• Every time a component/product is to be made, setting up of the tool is involved. Because of this some loss in production time will be there. Therefore, maximum number of units are produced once the machine is set in order to reduce the cost per unit.
• Such large production at one run will lead to accumulation of inventory and the costs related thereto.
• Thus, there is a quantity for which reduced cost of production is just offset by costs of carrying the quantity inventory. The determination of most economical batch quantity requires consideration of many related factors of costs and economies.

Cost Influence:

• Set up cost
• Rate of consumption.
• Storage cost
• Interest on capital
• Manufacturing cost

Types of Cost:

• Set-up costs
• Carrying costs

The following formula is used to calculate Economic Batch Quantity is as follows:

Economic Batch Quantity = √{DS/IC}

Were,

D = Demand for a period

S = Set up cost

I = Interest Rate

C = Cost per unit of manufacture