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Outline
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The production Range Effect on production cost Maximum profit batch size Maximum return Maximum rate of return Comparison of various criteria summary

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The production range

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P= Variable cost
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Minimum Variable cost

Convenient measure of increase in costs above the minimum P >1 QI=Qm[P Sq.root (P2-1)] QII= Qm[P + Sq.root(P2-1)]

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In conclusion when managers go for scheduling a number of products, desirable degree of flexibility can be ascertained in selecting batch sizes from this production range

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Effect on Production Cost

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Effect of P on Y depends upon Ratio of constant cost to variable cost per piece If u >>, slight increase in P does not cause a noticeable change in Total production cost Refer Ex. 5

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Minimum Cost batch size is unrelated to sales price Profit for whole batch also depends upon number of pieces in that batch Batch size can`t be increased too much as production costs will leave very marginal profit per piece

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Example
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A product is sold at a rate of 500 pieces a day and is manufactured at a rate of 2500 pieces a day. The setup costs of the machines are $1,000 and the storage costs are found to be 1.5*10 -3 dollars per piece per day. Labour charges are $3.20,materials $2.10 and overhead $4.10per piece. If the interest charges are 8%, find the Maximum profit batch size and the costs of the production run. Y=$10.5 per piece

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Implications
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Technical advantages like setup time per piece is reduced, schedule becomes smooth & uninterrupted Detailed method analysis is possible in long runs and may lead to saving labor , materials & overhead costs thus reduces total production cost per piece If production method is not changed production cost function is unchanged & if we go for Qp higher cost per piece is incurred

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The product remains for a longer time in stock This criteria may mislead

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Ratio of profit to the cost of production run Z n =Q* Y To attain max return Y should be min, implies that batch is produced at minimum production cost
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Maximum Rate of return

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Time factor has great importance when turnover of capital is considered High rate of return implies stock to be kept at min level & replenished at short interval times by small batches Batch size yielding max ROR is called economic batch size and it is < Qm F.E Raymond & P.T Norton suggested , economic batches are more profitable because a higher ROR on capital invested is achieved

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Rate of return (ROR) can also be found in terms of sales price (Y), Production cost (Y), and batch size(Q) & then maximize this expression ROR is the profit realized for every monetary unit invested/unit time

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Features of economic batch size

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Points to be remembered by Production Managers Reduction in setup cost will reduce economic batch size Below Qm cost function is steep & far more sensitive to batch size Less capital is tied to a particular production run Production time is shorter

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Comparison of various criteria

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25% increase in variable cost causes 7.1% increase in total production costs At q=1.4 profit function is max & 20% higher than profit at Qm Ratio of profit to cost of production is down by 15% ROR is 40% lower & half of its max At q=0.73 ROR is max Ratio of profit to cost of production is same But Cost of production is almost half

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Implication for Managers

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For most cases the best production range should lie between Qe & Qm (if costs at Qe are not to high) This range is called economic production range It may prove to be too narrow & may have to be expanded when scheduling difficulties arise Function of ROR is sensitive to batch size & leaves little room for flexibility

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Summary
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The minimum cost batch should be preferred in case of keen competition or likely changes in pricing policies Maximum profit batch involves high investment & low capital turnover & low profit and should be chosen if some technical advantages are to be gained An economic batch size should be preferred unless special benefits are to be gained from longer production run

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