1. Skycell, a major European cell phone manufacturer, is making production plans for the coming years.

Skycell has worked with its customers (the service providers) to come up with forecasts of monthly
requirements (in thousands of phones) as shown in Table 8-10.

Manufacturing is primarily an assembly operation, and capacity is governed by the number of people on
the production line. The plant operates for 20 days a month, eight hours each day. One person can
assemble a phone every 10 minutes. Workers are paid 20 euros per hour and a 50 percent premium for
overtime. The plant currently employs 1250 workers. Component costs for each cell phone total 20
euros. Given the rapid decline in component and finished-product prices, carrying inventory from one
month to the next incurs a cost of 3 euros per phone per month. Skycell currently has a no-layoff policy
in place. Overtime is limited to a maximum of 20 hours per month per employee. Assume that Skycell
has a starting inventory of 50,000 units and wants to end the year with the same level of inventory.

a. Assuming no backlogs, no subcontracting, and no new hires, what is the optimum production
schedule? What is the annual cost of this schedule?

b. Is there any value for management to negotiate increase of allowed overtime per employee per
month from 20 hours to 40?

Table 8-10

Monthly Demand for Cell Phones, in Thousands

Month Demand
Jan 1,000
Feb 1,100
Mar 1,000
Apr 1,200
May 1,500
Jun 1,600
Jul 1,600
Aug 900
Sept 1,100
Oct 800
Nov 1,400
Dec 1,700

c. Reconsider parts (a) and (b) if Skycell starts with only 1,200 employees. Reconsider parts (a) and (b) if
Skycell starts with 1,300 employees. What happens to the value of additional overtime as the workforce
size decreases?

d. Consider part (a) for the case in which Skycell aims for a level production schedule such that the
quantity produced each month does not exceed the average demand over the next 12 months
(1,241,667) by 50,000 units. Thus, monthly production, including overtime, should be not more than
1,291,667. What would be the cost of this level production schedule? What is the value of overtime
flexibility?