Posted on by Judy

You are the owner of a company which produces shoes. This is a seasonal business, but year to year, the demand patterns are stable. Due to your equipment constraints, the total number shoes you can produce in a season is limited to 1,500 pairs. You can, however, keep an inventory of shoes at a holding cost of $0.20 per pair per season. The demand in each season is as follows: 2700, 400, 200, 950. What is the best production plan that you can devise?

The best production plan that I can devise is a long one:
Assumptions:
THere are 4 seasons NAMELY A B C and D
The demand given in the seasons remains same in all the years
An average shoe cost 50$ out of which profit is 25$ (INDUSTRY MARGIN AVERAGE)
Now if we take the production to be constant at 1500 pairs per season and demand as
A- 2700
B-400
C- 200
D-950
Now to minimize all costs I would try to run my factory in 3 seasons and keep the factory closed in 1season as it will help me decrease the labor costs and operational cost of the factory for 1 season and save me a lot of money.
Keeping in mind the demand we can fulfill it by working in 3 out of 4 seasons.
Total Demand =2700+400+200+950=4250
Total supply = 1500pairs/ season *3=4500 pairs
Demand Fulfilled
Now I will start operating the company in Season C produce 1250 pairs Sell 200 pairs and keep
1050 pairs in the inventory which would cost me .20*1050=210$
Now in season D, I will sell 950 pairs from the inventory and keep 100 while producing 1500 more pairs to be ready for season A
Inventory cost for season D= 1600*0.2=320$
Now in season A, I have 1600 pairs ready from the inventory and I will produce 1500 more pairs
Out of which 1100 will be sold taking the total for season A to 2700 Pairs and
I will be left with 400 pairs to be sold in season B
Inventory cost for season A = 400*.02=80 $
TOTAL INVENTORY COST= 210+320+80$= 610$
Here I am saving the cost of both inventory and the factory operations in season B which is the most cost-effective way to function.
 
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