A company has the cost structure shown in the table and faces a demand in July that exceeds capacity by 200 units. They enter June with an inventory of zero and a demand equal to capacity. Their best course of action in order to completely fill all of the orders for both June and July by the end of July is to: $$\begin{array} { | l | c | }
\hline { \text { Managerial Lever } } & \text { Cost } \
\hline \text { Regular production } & \$ 1,000 / \text { unit } \
\hline \text { Overtime production } & \$ 1,300 / \text { unit } \
\hline \text { Subcontracting } & \$ 1,200 / \text { unit } \
\hline \text { Inventory holding } & \$ 100 / \text { unit/month } \
\hline \text { Backlog cost } & \$ 400 / \text { unit/month } \
\hline
\end{array}$$
A)subcontract 200 units in June and use 100% of their regular capacity in both June and July.
B)subcontract 100 units in both June and July and use 100% of their regular capacity in both June and July.
C)produce 200 units using overtime in July and use 100% of their regular capacity in both June and July.
D)subcontract 200 units in July and use 100% of their regular capacity in both June and July.

Question

A company has the cost structure shown in the table and faces a demand in July that exceeds capacity by 200 units. They enter June with an inventory of zero and a demand equal to capacity. Their best course of action in order to completely fill all of the orders for both June and July by the end of July is to: $$\begin{array} { | l | c | } 
\hline { \text { Managerial Lever } } & \text { Cost } \
\hline \text { Regular production } & \$ 1,000 / \text { unit } \
\hline \text { Overtime production } & \$ 1,300 / \text { unit } \
\hline \text { Subcontracting } & \$ 1,200 / \text { unit } \
\hline \text { Inventory holding } & \$ 100 / \text { unit/month } \
\hline \text { Backlog cost } & \$ 400 / \text { unit/month } \
\hline
\end{array}$$
A)subcontract 200 units in June and use 100% of their regular capacity in both June and July.
B)subcontract 100 units in both June and July and use 100% of their regular capacity in both June and July.
C)produce 200 units using overtime in July and use 100% of their regular capacity in both June and July.
D)subcontract 200 units in July and use 100% of their regular capacity in both June and July.

Quizplus · Accepted Answer

Subcontracting 200 units in July while using 100% of regular capacity in both June and July ensures all orders are met without incurring inventory holding costs. Subcontracting costs less than overtime production and avoids the higher backlog cost.

A Company Has the Cost Structure Shown in the Table