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Cost of Production Effects

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Dundas Bike Components Inc. of Wheelville, Illinois, manufactures bicycle wheels in two
different sizes for the Big Bike Co. assembly plant located across town. David Dundas, the firm's
owner-manager, has just received Big Bike's order for the next six months.
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Month Wheel Size Total Monthly Orders Available Capacity Excess (Deficit) Capacity Inventory*
20 Inch 24 Inch Opening Closing
November 1,000 500 1,500 1,400 (100) - (100)
December 900 500 1,400 1,400 - (100) (100)
January 600 300 900 1,400 500 (100) 400
February 700 500 1,200 1,400 200 400 600
March 1,100 400 1,500 1,400 (100) 600 500
April 1,100 600 1,700 1,400 (300) 500 200
Total Order for Six Months 8,200 * Negative Inventory represents Back Orders
Closing Stock Required 300
Total Production Required 8,500

There is total order for 8200 units to be produced in the period of six months.
There is a requirement of creating stock of 300 units at the end of April.
Hence, total production required in six months is 8500 units (8300 units + 300 units).
Monthly Production Capacity on the basis of Available Resources is 1400 units per month (28 Resources * 50 units per month).
In Six Months, available resources can produce 8400 units (6 * 1400 units per month)
Hence, there is a shortfall of 100 units (8500 units - 8400 units) in Production Capacity over the period of six months.
As we can see from the table above, there would be Back Orders of 100 units for first two months, which is same as our overall production shortfall.

Now, we have three options ...

Solution Summary

This problem provides a brief insight into how costing is effected by various options available engage personnel for manufacturing a product.

$2.19