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.The strategy for meeting the requirements of the company as well as for maintaining the production and inventory level is demonstrated in the table below. The target is to achieve maximum possible benefit at the end of the year. This aim has to be attained even if the company has to bear losses for some months. The ultimate objective and the annual results should be the maximum possible profit for the year. The solution is provided as under.
The plan that is designed for inventory and production management for Susmar Shoes Inc. will ultimately have the profit of $804,250. To realize this profit, there have been months
where the production, inventories and demand vary. This is for achieving highest profit possible as well as utilizing the labor capacity to the fullest. The table below shows the split of the cost incurred and the profit/loss incurred per month.
The costs that are incurred, before, during and after production are discusses as under.
Cost of Raw Material – This is the cost of input that is required for the production of different types of shoes – A, B or C, which rests at $6 per unit.
Ordering Cost – The ordering cost is fixed and is not dependent on the number of units of raw material. It is set at $1500 per order.
Inventory Carrying Cost – This cost is incurred while transiting the inventory from the supplier to the factory where manufacturing of shoes takes place. This cost is $ 0.15 per unit per month.
Other Supplies – This cost includes the additional inputs that are required for the production of the shoes. These are miscellaneous and small items together which may not be set out in separate accounts. This supply constitutes $1 per unit and is a variable cost.
Cost of set up change – This is the cost involved in changing one set up from another. This is done to modify the set up for the manufacturing of different types of shoes A, B and C. Only one product can be produced at a time and it costs $ 900.00 to change the set-up from one product to the other.
Shift Change Cost – The cost of changing from double to single or from single to double shifts. It costs $ 4,000 to go from one shift to two shifts and $ 3,000 to go from two shifts to a single shift. This shift may be required because of change in the number of units to be produced.
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