ABC manufacturing company wishes to develop a monthly production schedule for the next three months. Depending upon the sales commitments, the company can either keep the production constant, allowing fluctuations in inventory, or inventories can be maintained at a constant level with fluctuating production. Fluctuating production necessitates in working overtime, the cost of which is estimated to be double the normal production cost of Rs. 12 per unit. Fluctuating inventories result in inventory carrying cost of Rs. 2 per unit per month. If the company fails to fulfill its sales commitment, it incurs a shortage cost of Rs. 4 per unit per month. The production capacities for the next three months are shown below: -

Determine the optimal production schedule. -

Mumbai University > MECH > Sem 7 > Operations Research

Marks: 10 M

Year: May 2014

• Keeping production constant:

In this case, production is fixed at 50 units per month (no overtime)

Total cost = Rs. 2140

• Keeping inventory constant:

In this case, production can be as much possible. But the same level of inventory needs to be maintained each month.

Total cost = Rs. 2800

Since the overall cost in the first case (production constant) is lower, the company should choose that schedule.