Page 107 - F2 - MA Integrated Workbook STUDENT 2018-19

Accounting for materials

3.4 Economic batch quantity (EBQ)

The EBQ model is primarily concerned with determining the number of items that
should be produced in a batch.

2C D
o
EBQ = D
C (1 – )

R

Q = Batch size

D = Demand per annum

C h = Cost of holding one unit for one year

C o = Cost of setting up one batch ready to be produced

R = Annual replenishment rate

Test your understanding 4

A company makes a component for one of its products in-house. It uses an
average of 4,000 of these throughout the year. The production rate for these
components is 400 per week and the cost of holding one item for the year is
$1.50. The factory is open for 50 weeks per year. The company has calculated
that the economic batch quantity is 2,000. What is the production setup cost
per batch?

A $213

B $240

C $600

D $860

Illustrations and further practice

Now try TYU question 8 from Chapter 5

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