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The Wood Valley Dairy makes cheese to supply to stores in its area. The dairy can make 344 pounds of cheese per day (359 days per year), and the demand at area stores is 59 pounds per day. Each time the dairy makes cheese, it costs $266 to set up the production process. The annual cost of carrying a pound of cheese in a refrigerated storage area is $1.01. Determine the minimum total annual cost.

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Answer:

the minimum total annual cost is $3,372.58

Explanation:

Step 1 Calculate the the Optimum Batch Size for Production run

OBS = √(2×Total demand×Set-up Costs)/Holding Cost per unit

       = √(2×59×359×$266)/$1.01

      =   3341

Step 2 Calculate the minimum total annual cost

Total costs = Set up costs + Carrying Costs

                   = (59×359)/3341 × $266 + 3341/2×$1.01

                   = $1,686.37 + $1,687.21

                   = $3,372.58

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