Current Process A motor sports manufacturer specializes in snowmobiles and has set their factory capacity to match the annual demand of 117,000 units if they run production during the year. Because they run level production even though their demand is seasonal, they end up stockpiling extra snowmobiles in spring and summer months in preparation for peak demand in fall and winter months. Of course, the big drawback with this strategy is the high inventory holding costs during the spring and summer months as they stockpile finished product. Under this level production strategy, each snowmobile sits in inventory an average of three months with an annual holding cost of $59. Proposed Plan To address their concerns over inventory holding costs, they are looking at a proposal whereby they would run production 10 months out of the year and shut down production for two months a year while they upgrade and maintain equipment. This shutdown would cost them $800,000 per year, but it would reduce the average time each unit sits in inventory to about one month. Under the original plan (level production during the entire year) how much do they spend on holding costs? Under the proposed plan where they would run production 10 months during the year, how much (in total ) would it cost the company (include shutdown costs and inventory holding costs)? At what unit demand would the cost of these two options be the same?

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Current Process

A motor sports manufacturer specializes in snowmobiles and has set their factory capacity to match the annual demand of 117,000 units if they run production during the year. Because they run level production even though their demand is seasonal, they end up stockpiling extra snowmobiles in spring and summer months in preparation for peak demand in fall and winter months.

Of course, the big drawback with this strategy is the high inventory holding costs during the spring and summer months as they stockpile finished product. Under this level production strategy, each snowmobile sits in inventory an average of three months with an annual holding cost of $59.

Proposed Plan

To address their concerns over inventory holding costs, they are looking at a proposal whereby they would run production 10 months out of the year and shut down production for two months a year while they upgrade and maintain equipment. This shutdown would cost them $800,000 per year, but it would reduce the average time each unit sits in inventory to about one month.

Under the original plan (level production during the entire year) how much do they spend on holding costs?
Under the proposed plan where they would run production 10 months during the year, how much (in total ) would it cost the company (include shutdown costs and inventory holding costs)?
At what unit demand would the cost of these two options be the same?

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