Return to the data for Lavare in Exercise 1. Now, assume that a third party has offered to produce sinks at $74 per unit. How does this change affect the optimal production plan without a promotion? How does this change affect the optimal timing of a promotion? Explain the changes.

Data From Exercise 1

Lavare, located in the Chicago suburbs, is a major manufacturer of stainless steel sinks. Lavare is in the middle of the demand and supply planning exercise for the coming year. Anticipated monthly demand from distributors over the 12 months is shown in Table 9-4.

The number of machine operators it hires governs capacity at Lavare. The firm works 20 days a month, with a regular operating shift of eight hours per day. Any time beyond that is considered overtime. Regular-time pay is $15 per hour and overtime is $22 per hour. Overtime is limited to 20 hours per month per employee. The plant currently has 250 employees. Each sink requires two hours of labor input. It costs $3 to carry a sink in inventory for a month. Materials cost per sink is $40. Sinks are sold to distributors at a price of $125 each. We assume that no stockouts are allowed and the starting inventory entering January is 5,000 units and the desired ending inventory in December is also 5,000 units Market research has indicated that a promotion dropping prices by 1 percent in a given month will increase sales in that month by 20 percent and bring forward 10 percent demand from each of the following two months. Thus, a 1 percent drop in price in March increases sales in March by 3,000(= 0.2×15,000) and shifts 1,800 (= 0.1×18,000) units in demand from April and 2,500(= 0.1 × 25,000) units from May forward to March.

a. What is the optimal production plan for the year if we assume no promotions? What is the annual profit from this plan? What is the cost of this plan?
b. Is it better to promote in April or July? How much increase in profit can be achieved as a result?
c. If sinks are sold for $250 instead of $125, does the decision about the timing of the promotion change? Why?

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Table 9-4 Anticipated Monthly Demand for Lavare