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Question
Washington Laundry Products, Inc., makes commercial and industrial laundry machines (the kinds hotels use), and has these aggregate demand requirements for the next six months. The firm has regular capacity for 200 units, and overtime capacity for 40 more. Currently, subcontracting can supply up to 100 units per month, but the subcontracting firm may soon be unavailable.
| Month | Demand | Costs and other data | ||
| 1 | 220 | Previous output level | 150 units | |
| 2 | 160 | Beginning inventory | 100 units | |
| 3 | 200 | Stockout cost | $250 per unit | |
| 4 | 210 | Inventory holding cost | $100 per unit at end of month | |
| 5 | 200 | Unit Cost, regular time | $1,200 per unit | |
| 6 | 190 | Subcontracting | $2,000 per unit | |
| Unit Cost, overtime | $1,500 per unit | |||
| Hiring workers | $200 per unit | |||
| Laying off workers | $500 per unit | |||
Which is cheaper: to produce level, incurring back orders and inventory charges; or to produce a base quantity of 120, using first, overtime, then subcontracting, to meet demand?
Answer
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