Pies ‘R’ Us bakes its own pies on the premises in a large oven that holds 100 pies. They sell the pies at a fairly steady rate of 86 per month. The pies cost $2 each to make. Prior to each baking, the oven must be cleaned out, which requires one hour’s time for four workers, each of whom is paid $8 per hour. Inventory costs are based on an 18 percent annual interest rate. The pies have a shelf life of three months.

 

a. How many pies should be baked for each production run? What is the annual cost of setup and holding for the pies?

b. The owner of Pies ‘R’ Us is thinking about buying a new oven that requires one-half the cleaning time of the old oven and has a capacity twice as large as the old one. What is the optimal number of pies to be baked each time in the new oven?

c. The net cost of the new oven (after trading in the old oven) is $350. How many years would it take for the new oven to pay for itself?