Production Planning And Cost For Icanride Bicycle Company

1. The Icanride Bicycle Company has the following projected sales demand for the next 6 months (assume each month has the same number of production days): Month Demand 1 2,500 2 3,600 3 2,900 4 3,300 5 4,000 6 3,500 
Inventory costs them $10 per month per bike based on average monthly inventory (beginning plus ending inventory divided by 2), and any shortage costs them $15 in lost profit. They currently have 30 workers, each capable of producing 100 bikes per month. The workers can produce 20 extra bikes per month on overtime, but it costs an additional $14 in overtime cost per bike produced in overtime.

a. Compute the cost of using overtime and inventory production without short-ages. Can they accomplish that goal under current circumstances?

b. Compute the cost of producing only using overtime and shortages (if neces-sary).

c. Which alternative is better? Discuss. . . 

As per the given scenario, the total production cost has been considered with the total number of units which are to be produced for the given demand. For instance, in the first month, there is a demand of only 2500 units whereas, the employees are capable of producing 3000 units (30x100). Therefore, the company has saved the cost of inventory for producing any additional unit, which is also reflected with no overtime workers needed nor any overtime production cost. However as per the demand in the second month, there is a deficit of 600 units (3600-3000). This will require inventory cost for additional 600 units which amounts to $ 14400 (600x24). The production cost has been considered in such a manner that there are no shortages in the product line. In this way, the total plan cost is depicted as $ 231600 without any shortages. It can be clearly seen that this goal can be achieved under such a circumstance (Chapman 2006).

In the second section, it is clearly instructed to compute the cost of production by only using over time and shortages. The assertion of total production units is considered with overtime capacity of producing 120 units instead of 100 units (normal capacity). In this way, the maximum production capacity per month using only overtime capacity is computed as 3600 units instead of 3000 units. The inventory cost during the first month was calculated as $ 60000 (24x2500). Similar assertions are made in other months as well for computing inventory cost. However, in the fifth month there is a shortage of 400 units which resulted in $ 6000 (400x15) in lost sales. In this way, total plan cost is depicted as $ 471600 (Driessen et al. 2015).

On comparing the total plan cost of both scenarios, it can be seen that the computation using cost of overtime and inventory production without any shortages will save $ 240000 ($ 471600-$ 231600) for Icanride Bicycle Co. Therefore, the first alternative should be selected.

References:

Chapman, S.N., 2006. The fundamentals of production planning and control. Upper Saddle River, NJ: Pearson/Prentice Hall.

Driessen, M., Arts, J., van Houtum, G.J., Rustenburg, J.W. and Huisman, B., 2015. Maintenance spare parts planning and control: a framework for control and agenda for future research. Production Planning & Control, 26(5), pp.407-426.