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5) A company faces the following demands during the next three weeks: week 1, 20 units; week

2, 10 units; week 3, 15units. The unit production costs during each week are as follows: week 1,
$13; week 2, $14; week 3, $15. A holding cost of $2 per unit is assessed against each week’s
ending inventory. At the beginning of week 1, the company has 5 units on hand. In reality, not all
goods produced during a month can be used to meet the current month’s demand. To model this
fact, assume that only half of the goods produced during a week can be used to meet the current
week’s demands.

a. Determine how to minimize the cost of meeting the demand for the next three weeks.

b. Revise the model so that the demands are of the form Di + ∆ki , where Di is the original
demand (from above) in month I, K is a given factor, ∆i is an amount of change in month I
demand. Formulate the model and analyze changes in the amounts produced and the total cost
when K varies from 0 to 10 in 1-unit increments, for any fixed values of the ∆i’s. For example
Try this when ∆1 = 2, ∆2 = 5, and ∆3 = 3. Describe the behavior you observe in the table. Can you
find any reasonable ∆is that induce positive production levels in week 3?


1st – Arrange a Summary Table

Perio Unit Production Initial Inventory
d Demand Cost per Inventor Cost Per
per Period Unit y Unit

1 20 $13 5 $2

2 10 $14 $2

3 15 $15 $2

2nd – Determine the Decision Variables:

xi = Units Produced per period (i= 1, 2, 3)
Ii = Inventory per period (i = 1, 2, 3)
di = Demand per period (i = 1, 2, 3)
3 – Compose an Objective Function:

The function’s goal will be to determine the distribution of production that will reduce
total cost by the most; thus the function must be a summation of all cost factors.
min Z= $13(x1) + $14(x2) + $15(x3) + $2(I1) + $2(I2) + $2(I3)
4th – Identify All Constraints:
Production, Inventory, and Demand cannot be negative. So
xi ≥ 0 Ii ≥ 0 di ≥ 0 (i = 1, 2, 3)

The current period’s inventory will always be the last period’s inventory plus that
period’s production, minus what is shipped to fill demand. Thus
Ii = Ii-1 + xi - di
Plugging in actual values, you get
I1 = 5 + x1 – 20 I2 = I1 + x2 – 10 I3 = I2 + x3 – 15
x1 - I1 = 15 I1 + x2 - I2 = 10 I2 + x3 - I3 =15

Finally production must satisfy demand. Since only half of production can be used to fill
demand, you get
(xi/2) + Ii-1 ≥ di
Plugging in actual values, you get
(x1 /2) + 5 ≥ 20 (x2 /2) +I1 ≥ 10 (x3 /2) + I2 ≥ 15
x1 ≥ 30 x2 + 2I1 ≥ 20 x3 + 2I2 ≥ 30

Again the formulation of the constraints must be changed in a way that puts all variables on the
left side, and all numerical values on the right side.


Sensitivity Analysis

Minimum Cost $590

# Produced - Min z Period 0 Period 1 Period 2 Period 3

Demand 20 10 15
Production Cost $13 $14 $15
Inventory 5 15 15 0
Units Produced 30 10 0

Inventory Shadow $12 $14 $14

Increase in $1 $0 $1
Production Shadow

To meet the demand for the three periods at the lowest cost, this company would need to produce
30 units for the first period given their 5 unit beginning inventory. The second period would
require them to produce 10 units, while producing no units in the last period.

Following these production guidelines would yield a final cost of $590. Looking at the
increase in demand of one unit per period, we can see the effect would be an increase in cost of
$1 in the first period, $0 in the second period and $1 in the third.

Sensitivity analysis was conducted on the production cost and production demand in
period one to see the effect it has on our final cost. The first sensitivity analysis on production
cost was completed by changing the cost from $13 to $12 and then down to $11. Results are
presented in the table below.

Production Cost per Unit Final Cost Change in Final Cost From
$13 $590
$12 $560 -$30
$11 $520 -$70
We can see that a reduction in our production cost will change our final cost as well. It should be
noted that given the drop in production cost and the cost of inventory, a different production
schedule would be used.

The second sensitivity analysis conducted involved changed the production demand
during period one and seeing the effects it had on our final cost. The demand was changed from
15 to 30 as well as from 15 to 5. Although the demand for period one is stated as 20, it should be
noted that we start with an inventory of 5 units which is subtracted from the period one demand.
Results are presented in the table below.

Demand Period 1 Final Cost Change in Final Cost From

15 $590
30 $770 $180
5 $470 -$120
We can see that a change in our demand during period one would change our final cost.
Although the change in final cost is expected, we would expect that a change in production
schedule would accompany this change in demand.