DBA, Session 1
Economic Analysis
Case
Case Study
Company Z is producing and selling toys. Demand and production are following a seasonal pattern. (not stable over time)
Demand, production capacity and labor capacity are projected (estimated or forecasted) to be as follows over the next 12
months:
Month Demand Production Workers Capacity
(units) Capacity (units) (# of workers)
January 1000 1000 10
February 400 400 4
March 400 400 4
April 400 400 4
May 400 400 4
June 400 400 4
July 500 500 5
August 500 500 5
September 1000 2000 20
October 1500 2000 20
November 2500 2000 20
December 3000 2000 20
- Initial number of workers is 10
- Each worker can produce (on average) 100 units monthly. (number of workers= regular production/100)
- Overtime is limited to 300 units of production
- Subcontracting is unlimited
- Initial inventory is zero.
How to calculate what we have of production? INV(t-1) + RegQ(t) + OT(t) + SC(t)
DBA, Session 1
Economic Analysis
Case
Wage rates are: (cost per worker per unit of production)
• $10 per unit for regular production
• $15 per unit for overtime production
• $25 per unit for subcontracting
- Demand must be met (what we have ≥ demand) (What we have = RegQ(t) + OT(t) + SC(t) + INV(t-1))
- Inventory cost is $1 per unit per month
- Cost of hiring new workers is $1000 per worker (# workers(t-1) - # workers (t)
- Cost of firing workers is $500 per worker
Required:
1) Level of optimal production every month.
2) Value of total minimum labor cost for the year
DBA, Session 1
Economic Analysis
Case
Steps: (Major requirements from you)
(1) What is the objective? The objective is minimum total cost for the year.
(2) What is the decision variable? It is the variable we want to estimate its optimal value in order to achieve
the objective (minimum total cost). This variable is regular production
(3) What are the constraints?
The objective function: minimum total cost
Total cost includes:
1. Regular production cost per unit
2. Overtime cost per unit
3. Subcontracting cost per unit
4. Inventory cost per unit per month
5. Hiring cost per worker
6. Firing cost per worker
DBA, Session 1
Economic Analysis
Case
The Decision Variable
Regular Production Q
The Constraints
5 constraints
1. Over time constraint Total OT ≤ 300
2. Demand constraint what we have ≥ demand
3. Production constraint Reg Q ≤ Capacity
4. Work force constraint
5. Q is integer