A company has the cost structure shown in the table and faces a demand in July that exceeds capacity by 200 units. They enter June with an inventory of zero and a demand equal to capacity. Their best course of action in order to completely fill all of the orders for both June and July by the end of July is to subcontract the extra 200 units in June and hold the inventory one period for July's demand.
$$\begin{array} { | l | c | }
\hline { \text { Managerial Lever } } & \text { Cost } \
\hline \text { Regular production } & \$ 1,000 / \text { unit } \
\hline \text { Overtime production } & \$ 1300 / \text { unit } \
\hline \text { Subcontracting } & \$ 1200 / \text { unit } \
\hline \text { Inventory holding } & \$ 100 / \text { unit/month } \
\hline \text { Backlog cost } & \$ 400 / \text { unit/month } \
\hline
\end{array}$$

Question

A company has the cost structure shown in the table and faces a demand in July that exceeds capacity by 200 units. They enter June with an inventory of zero and a demand equal to capacity. Their best course of action in order to completely fill all of the orders for both June and July by the end of July is to subcontract the extra 200 units in June and hold the inventory one period for July's demand.
 $$\begin{array} { | l | c | } 
\hline  { \text { Managerial Lever } } & \text { Cost } \
\hline \text { Regular production } & \$ 1,000 / \text { unit } \
\hline \text { Overtime production } & \$ 1300 / \text { unit } \
\hline \text { Subcontracting } & \$ 1200 / \text { unit } \
\hline \text { Inventory holding } & \$ 100 / \text { unit/month } \
\hline \text { Backlog cost } & \$ 400 / \text { unit/month } \
\hline
\end{array}$$

Quizplus · Accepted Answer

Subcontracting the extra 200 units in June and holding them for July's demand would indeed ensure all orders are met. However, it may not be the best course of action without comparing the total costs of this strategy to other potential strategies, such as overtime production or a combination of options. The decision should be based on minimizing total costs while meeting demand.

A Company Has the Cost Structure Shown in the Table