Economic Production Run (EPR) - The Strategic CFO®

Economic Production Run (EPR)

Other Category: Economics

July 23, 2013
Dan
economic production run, insurance, inventory, manufacturing, production

Economic Production Run (EPR) Definition

Economic production run is the most cost-efficient quantity of units to produce at a time. When managers of a manufacturing operation make decisions about the number of units to produce for each production run, they must consider the costs related to setting up the production process and the costs of holding inventory. Given set up costs, carrying costs, and the requirement for units produced per year, EPR calculates the optimal quantity of units to produce for each production run.

There is an equation for computing the exact EPR. The equation requires three input variables. The first is an estimate of the number of units that need to be produced per year. This is the number of units the company needs to produce to meet estimated consumer demand. Then the second variable is the estimated cost of setting up a production run. Finally, the third variable is the estimated cost of holding one unit of inventory for a year. These inventory holding costs include costs such as storage, handling, and insurance.

Economic Production Run Equation

Economic production run equals the square root of two times the annual requirement times the cost of setting up each production run. Then divide that by the annual holding cost per unit. Use the following economic production run equation:
EPR = √ ((2 x R x C) / H)
EPR = Economic production run quantity
R = Annual requirement of units produced
C = Setup cost per production run
H = Annual holding cost per unit of inventory
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Source:
Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.

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