Question

Question:A firm wants to justify smaller lot sizes economically. Management knows that it cannot change the cost to carry one unit in inventory since this is largely based on the value of the item. To justify a smaller lot size, what must it do?

Short answer

Answer

Reduce the setup cost.

Step-by-step solution

Setup cost

Setup cost is considered to be a non-value-added step of the manufacturing process. Setup cost is the cost that is incurred during the process of getting the equipment ready to process the production of the final goods.

Faster setups, for instance, allow a company to make a wider range of items or a bigger number of items in the same length of time. Shorter setups allow for faster responsiveness to consumer requests as well as lower, more cost-effective lot sizes. As a result, decreasing setup times (or expenses) is a key operational goal.

To justify a smaller lot size

Tojustify a smaller lot size, the firm needs to reduceits setup cost. There are several benefits of reducing the setup cost such as improved cash flows, lower manufacturing costs, better processing quality, etc.