Minimum cost method
Method of the minimum is one of the methods used to calculate the optimum size of the production batch. This method uses a graphical or analytical techniques. Both of these techniques use the same assumptions relating to the unit cost of components. Main criterion for calculation is minimal unit cost of production.
The graphics technique uses charts of costs of all components of the unit of production. Increasing the quantity of units in a lot of simple products does not change the unit fixed costs. Level of unit costs is driven by the cost of preparatory and finishing activities.
The optimal batch size of products can also be calculated using analytical techniques and mathematical formulas. To calculate optimal batch size managers can use various formulas and models, the greatest difficulty in the calculation is determining the cost resulting from asset utilization.
- Song, W. T., & Schmeiser, B. W. (1995). Optimal mean-squared-error batch sizes. Management Science, 41(1), 110-123.