During the next four quarters, Dorian Auto must meet (on time) the following demands for cars:...

During the next four quarters, Dorian Auto must meet (on time) the following demands for cars: 4000 in quarter 1; 2000 in quarter 2; 5000 in quarter 3; 1000 in quarter 4. At the beginning of quarter 1, there are 300 cars in stock. The company has the capacity to produce at the most 3000 cars per quarter. At the beginning of each quarter, the company can increase (but not decrease) its production capacity. It costs $100 to increase production capacity by one unit. For example, it would cost $10,000 to increase production capacity from 3000 cars per quarter to 3100 cars per quarter. It also costs $40 per quarter to maintain each unit of production capacity (whether it is used or not). The variable cost of producing a car is $2000. A holding cost of $150 per car is assessed for each quarter’s ending inventory. It is required that at the end of quarter 4, plant capacity must be at least 4000 cars.

(1) Determine how to minimise the total cost incurred during the next four quarters.

There is a concern that due to rising material and labour costs, the variable cost in the fourth quarter may increase by 10%.

(2) Should you change your production plan if you believe this increase will occur?

(3) What would you do if you believed that there would be a 20% increase in variable costs in the fourth quarter?

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orchestra answered 1 year ago

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