The Mixing and Bagging Company produces a line of commercial animal feeds in 10 mixes. The production process itself is simple. A variety of basic grain and filler ingredients is mixedin batches. The mixture is then fed to an intermediate storage hoper, from which it is conveyedto a bagging operation. The bags of feed are then loaded on pallets and moved to the nearbywarehouse for storage.
A foreman supervises the operations. A full-time worker who operates the mixing and blending equipment, plus four full-time and 10 part-time workers provide direct labor. The foremanis paid Rs.15, 000 per year; the mixer-operator, Rs. 5 per hour; the other full-time workers,Rs. 4 per hour; and the 10 part-time workers, Rs. 3 per hour.
The usual routine for a production run is as follows: The foreman receives job tickets from the office indicating the quantities to be run and the formula. The job tickers are placed in theorder in which they are to be processed. At the end of a run, the foreman purges the mixingsystem and ducts of the previous product. This takes 20 minutes.
Meanwhile, the foreman has directed the mixer-operator and the four full-time employees to obtain the required ingredients for the next product from the storeroom. When the mixingequipment has been purged, the mixer and gets it started. This takes about 10 minutes. The totaltime spent by the mixer-operates in obtaining materials and loading the mixer is 30 minutes. Thefour full-time employees devote 30 minutes to obtaining materials.
While the previous activities are being performed the foreman turns his attention to the bagger line, which requires minor change over for bag size and the product identifying lable thatis sewed to the top of bag as it is sewed closed.
While the foreman is purging the system, the 10 part-time employees transfer what is left of the last run to the warehouse, which requires about 15 minutes. They then idle until the finishedgoods warehouse is valued according to the sale price of each item, which is about Rs. 5 per100 kg. The cost of placing items in the warehouse has been calculated as approximatelyRe. 0.20 per 100 kg, based on the time required for one of the part-time workers to truck it tothe warehouse and place it in the proper location. The front office has calculated that the storagespace in the owned warehouse is worth about Rs. 10 per square foot per year, but because thebags are palletized and stacked 12 feet high, this cost has been reduced to only Re. 0.20 per 100kg per year. The product mixes are stable, and there is very little risk of obsolescence. Thereis some loss because uninvited guests (rats, etc.) come in to dine. The total storage andobsolescence costs ate estimated as 5 per cent of inventory value.
The Mixing and Bagging Company has a factory overhead rate that it applied to materials and direct labor. This overhead rate is currently 100 percent and is applied to the averagematerial cost of Rs. 1.87 per 10 kg plus direct labor costs of Re. 0.13 per 10 kg. The companyearns 8 per cent after taxes and can borrow at the local bank at an interest rate of 9 per cent.
The factory manager is currently reviewing the bases for deciding the length of production runs for products. He figures that operations are currently at about 85 per cent of capacity. Hehas heard of EOQ as a basis for setting the length of production runs. What values should heassign to cpand cHfor his operations?