|Demand in 1000 Gallons|
Essentially, there are three basic strategies for satisfying this fluctuating demand:
Each product must be processed in each of the company's two principal departments, Preparation and Finishing. Each 1000 gallons of Amide requires one hour of processing in each of Preparation and Finishing. Each 1000 units of Nitrile requires one hour in Preparation but 1.5 hours in Finishing.
Regular time costs $3 per hour and $2.50 per hour in Preparation and Finishing, respectively. Overtime costs in the two departments are $4.50 per hour and $3.50 per hour. Regular time is in this sense always preferable to overtime because it costs less; however, changing the amount of regular time from one period to the next is undesirable because it involves such things as hiring and laying off people. The company feels that it costs $5 for each change (up or down) of one hour in the regular time used per period (quarter) in the Preparation Department. The analogous cost in the Finishing Department is $6. Thus, for example, if the regular time used in the Preparation Department is 120 one period and 40 the next period, a cost of $400 is incurred simply because of changing the capacity in the Preparation Department. It is the company's experience that the overtime in any particular period cannot exceed 50 per cent of the regular time.
The question now is: "What should be the planned levels of regular time, overtime, and inventories for each period?" Treat the problem as a cyclic one, that is, the ending inventories in the Winter Quarter are the entering inventories in the Spring Quarter, we will have to pay for any changes in levels from the Winter Quarter.