ombined in the EOQ formula. When this occurs, the product of i * C is represented by the symbol H, which is the inventory holding cost in dollars per unit, per year.)
Errors in Calculating EOQs
Setup cost (S) errors
...
ombined in the EOQ formula. When this occurs, the product of i * C is represented by the symbol H, which is the inventory holding cost in dollars per unit, per year.)
Errors in Calculating EOQs
Setup cost (S) errors
These errors result from incorrectly including an allocation of fixed annual expenses as components of the total setup cost. Setup costs should include only actual, out-ofpocket costs (as should all the costs used in the calculation of the EOQ) that are directly related to setting up the production line to make a specific item (SKU). Jake Evans and Josh Francis — as well as the buyers who purchase the raw ingredients and packaging material for 3Js — are full-time workers who earn a predetermined yearly salary. Consequently, reasonable changes in the number of setups per year will not change the total cost of these individuals. Thus, regardless of whether
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Case Study 1 Three Jays Corporation 831512392
they are employed by Fremont Jams and Jellies, or 3Js, there are no incremental costs that are incurred with respect to setups. Therefore, the costs of changing the rails on the assembly line to accommodate different jar sizes — as well as the costs of cleaning the equipment and switching out the jar labels between batch sizes — should not be included in the setup cost (S). Similarly, the costs of the two individuals employed in the kitchen should not be included in the setup costs. These costs should be considered only as the maximum capacity f these individuals is approached and additional people and/or equipment are required. At that point, changes could be considered that would postpone the need for expansion, which would suggest that an appropriate tradeoff analysis should be conducted. Thus, with the current production system, the only relevant setup costs are the part-time wages paid to the three temporary workers, who are idle while the line is shut down for cleaning and label changes. The setup costs are therefore equal to:
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