We are formulating an aggregate plan for an 8-quarter period. Our demand forecast is as follows:
Quarter 1 2 3 4 5 6 7 8
Forecast 160 280 360 240 180 300 380 260
We will enter Quarter 1 with 0 units in inventory.
Inventory holding cost is charged as $12 per quarter per unit in average inventory. If, for example, in a given quarter Beginning Inventory was -10 units and Ending Inventory was +20 units, average inventory would be +5 units, so holding cost in that quarter would be $60.
If in a given quarter we wind up with negative Ending Inventory, we charge ourselves $60 per unit in backorder cost. This only applies to Ending Inventory.
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