Abc inc. is planning the production schedule for the next 8 weeks. the forecaste

Question

Abc inc. is planning the production schedule for the next 8 weeks. the forecasted demand for the next 8 weeks is 700, 800, 900, 500, 1100, 1000, 800, and 900 respectively. abc can produce 800 units per week in regular time and 200 more in overtime. the regular time production cost is $10.00 per unit which takes into account $4.00 for materials, $1.00 for utilities, and $5.00 for manpower. the manpower cost for overtime is twice the regular rate. holding a unit in inventory costs $1 per unit per week. there is also a cost for been late, at $2.00 per unit per week. the maximum lateness allowed is 2 weeks. it is the company's policy not to have any item in inventory for more than 3 weeks. how much should abc produce each week?

Explanation / Answer

There are two options for the company to produce:

First option:

Produce 800 units per week:

Particulars

Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

700

800

900

500

1100

1000

800

900

800

800

800

800

800

800

800

800

100

-

-

(since earlier excess utilized after 2 weeks)

300

-

(since utilised excess 300 units after 1 week)

200

-

-

(since utilised excess 100 units after 2 weeks)

$10

$10

$10

$10

$10

$10

$10

$10

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

f.)Overtime cost

-

-

-

-

-

-

-

-

g.)Inventory Holding

cost

1

1

1

1

1

1

1

1

h.)Total Holding cost

(g*c)

(100*2)= $200

-

-

(300*1)=$300

-

-

-

(200*2)=$400

i.)Total All cost

= (e+h)

8200

8000

8000

8300

8000

8000

8000

8400

Therefore, total cost of Regular production= $(8200+8000+8000+8300+8000+8000+8000+8400)= $64,900

Second option:

Produce as required units per week:

Particulars

Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

700

800

900

500

1100

1000

800

900

700

800

900

500

1100

1000

800

900

-

-

100

-

300

200

-

100

$10

$10

$10

$10

$10

$10

$10

$10

$7,000

$8,000

$9,000

$5,000

$11,000

$10,000

$8,000

$9,000

f.) Extra Overtime production cost

15

15

15

15

15

15

15

15

g.)Total overtime production cost= f*c

-

-

1500

-

4500

3000

-

1500

h.)Total All cost

= (e+g)

7000

8000

10,500

5000

15500

13000

8000

10,500

Therefore, total cost of Regular production= $(7000+8000+10500+5000+15500+13000+8000+10500)= $77500

First option to produce 800 units per week is the best.

Particulars

Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Week 8

1. Demand

700

800

900

500

1100

1000

800

900

1. Production

800

800

800

800

800

800

800

800

1. Excess production/Holding

100

-

-

(since earlier excess utilized after 2 weeks)

300

-

(since utilised excess 300 units after 1 week)

200

-

-

(since utilised excess 100 units after 2 weeks)

1. Production cost per unit

$10

$10

$10

$10

$10

$10

$10

$10

1. Total production cost= (d*b)

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

f.)Overtime cost

-

-

-

-

-

-

-

-

g.)Inventory Holding

cost

1

1

1

1

1

1

1

1

h.)Total Holding cost

(g*c)

(100*2)= $200

-

-

(300*1)=$300

-

-

-

(200*2)=$400

i.)Total All cost

= (e+h)

8200

8000

8000

8300

8000

8000

8000

8400

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