Question

Demand over the next four months are 450, 500, 350, and 400 respectively. Regular time production costs $10 per item, and we can make a maximum of 400 items in a given month in regular time. Overtime production costs $16 per item, and as many as 200 items may be produced in overtime each month (in addition to the regular time production). Keeping an item in inventory incurs a cost of $1 per period; backorders cost $3 per period per item. If we follow a level strategy of production, what would be the cost of production? (= cost of regular time production + cost of overtime production + inventory cost + backorder cost)

Answer 1

Answer given herein below.

Month	1	2	3	4
Demand	450	500	350	400
Regular Time Production	400	400	400	400
Overtime Production units	50	100	0	0
Regular Time Production Costs/Item	$            10	$         10	$         10	$         10
Overtime Time Production Costs/Item	$            16	$         16	$         16	$         16
Inventory Costs/Item	$              1	$           1	$           1	$           1
Backorders Costs / Item	$              3	$           3	$           3	$           3
Costs of Production / Month	1	2	3	4
Cost of regular time production	$      4,000	$   4,000	$   4,000	$   4,000
Costs of overtime production	$          800	$   1,600	$          -	$          -
Inventory costs	$          450	$       500	$       350	$       400
backorder costs	$          150	$       300	$          -	$          -
Costs of Production	$     5,400	$ 6,400	$ 4,350	$ 4,400
Formula
Cost of regular time production	Regular Time Production * Regular time production costs per item
Costs of overtime production	Overtime Time Production * Overtime time production costs per item
Inventory costs	Inventory Costs per item * Demand
backorder costs	Backorder Costs per item * Overtime production units