Production Planning: Cost, Capacity, and Demand Impact on Strategy

This essay explores the crucial role of production cost, inventory cost, production capacity, and market demand in the production planning process of a business. It emphasizes the importance of considering these factors to optimize production, set appropriate prices, and maximize profitability. The essay includes a minimum cost computation based on given demand, production cost, and capacity data for a five-month period, along with cost computations under different conditions such as increased demand, increased cost, decreased capacity, and doubled inventory cost. It concludes that effective production planning requires careful analysis of these variables to align production with market conditions and achieve the company's financial goals. Desklib provides access to this and other student-contributed assignments for educational purposes.

Running head: COSTING APPROACH
Costing Approach
Name of the Student:
Name of the University:
Author’s Note:

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COSTING APPROACH
Introduction
The process of planning is considered to be very important from the perspective of a
business and it is on the basis of such planning that activities of the business are undertaken. In a
business environment, a lot of plans and budgets are formulated by the management out of which
one of the most important budget is cost budgets which clearly shows the costs estimates of the
business (Afuah, 2014). The estimates are considered for planning for activities of the business
and for the purpose of setting the prices for the business.
Discussion
The costs of the business are estimated and considered by following different approaches
and principles of costing. In a business situation, important decisions regarding the production
process and also regarding various activities of the business are taken on the basis of profits and
costs of the business (Shepherd, 2015). While considering the costs of the business, there are
certain components which the management of the company need to check such as unit costs,
production capacity if the business, raw material costs, demand for the product in the market.
These factors need to be considered by the management of the company for taking any major
decisions regarding the product which is to be offered to the consumers and also regarding the
entire production process.
The production costs of the business are an important consideration which the
management needs to consider as the same is important for estimating the profits which can be
generated by the business and also the price for the products which is to be offered to the
consumers. The production costs for a particular production process also determines whether the

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project needs to be undertaken by the management or not as the costs is an important basis which
affects the revenue and ultimately the profitability of the business.
Inventory costs is also another component which needs to be considers as they are costs
of the raw materials which forms a major part of the costs of production of the business (Hitomi,
2017). The procurement of inventory for the process and considering the different costs
associated with raw materials such as handling costs, ordering costs ad carrying costs need to be
considered (Seyedhosseini & Ghoreyshi, 2014). In case the overall inventory costs is high,
management of the company is discouraged from continuing with the operations as the overall
costs of production is likely to be very high in such situations.
The production capacity of the business refers to the total ability of the business to
produce the maximum output given the level of materials, labour and capital and current level of
efficiency. The production capacity of a business is said to be maximum if the business utilizes
all the resources available to its efficiently and fully and thereby ensure that maximum output is
produced by the business (Song et al., 2017). The number of units which is produced by the
management of the company has a direct impact on the costs of the business and therefore
production planning is done after considering the capacity at which the business would be
operating for the current level of activity (Kaya, Bagci & Turkay, 2014). The production
capacity decisions therefore affect the planning process as this also is done on the basis of market
conditions.
The demand for the product in the market is a factor which is considered by the business
before setting the capacity at which the business will be operating (Maiti & Giri, 2015). As the
demand for the product which is offered by the business increases the management of the

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company would be tempted to produce more so that overall revenue which is generated by the
business can be further enhanced (Han et al., 2016). This also implies that the business would be
able to generate more profits for the business during the period. Therefore, it is clear that the
demand for the product in the market plays a vital role for the business in decision making
process.
i) Minimum Cost Computation
Month January February March April May
Demand (units) 1500 2800 3000 4200 5400
Unit production cost in ($) 20 23 27 30 38
Capacity (units) 2000 3000 3500 4500 6000
Inventory cost ($) $5
Total cost=D*P+IC 31500 67620 85050 132300 215460
minimum cost 42500 70000 97000 136500 148200
ii) Cost Computation under Different Conditions
1. 5% Increase in Demand
Month January February March April May
Demand (units) 1500 2800 3000 4200 5400
increase by 5% 1575 2940 3150 4410 5670
Unit production cost in ($) 20 23 27 30 38
Capacity (units) 2000 3000 3500 4500 6000
Inventory cost ($) $5
minimum cost 42125 69300 96250 135450 180310
2. Increase in Cost by $2
Month January February March April May
Demand (units) 1500 2800 3000 4200 5400
Unit production cost in ($) 20 23 27 30 38
increased by $ 2 22 25 29 32 40
Capacity (units) 2000 3000 3500 4500 6000
Inventory cost ($) $5
minimum cost 46500 76000 104000 145500 156000

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3. Decrease in Capacity by 50 Unites Every Month
Month January February March April May
Demand (units) 1500 2800 3000 4200 5400
Unit production cost in ($) 20 23 27 30 38
Capacity (units) 2000 3000 3500 4500 6000
decreased by 50 1950 2950 3450 4450 5950
Inventory cost ($) $5
minimum cost 41250 68600 95400 134750 148200
4. Doubled (i.e.=$10) Inventory Cost
Month January February March April May
Demand (units) 1500 2800 3000 4200 5400
Unit production cost in ($) 20 23 27 30 38
Capacity (units) 2000 3000 3500 4500 6000
Inventory cost ($) $5
Total cost=D*P+IC 31500 67620 85050 132300 215460
Inventory cost ($) $10
Total cost=D*P+IC 33000 70840 89100 138600 225720
Minimum Cost 45000 71000 99500 138000 148200
Newer Data:
Month January February March April May
Demand (units) 1575 2940 3150 4410 5670
Unit production cost in ($) 22 25 29 32 40
Capacity (units) 1950 2950 3450 4450 5950
Inventory cost ($) $10
Total cost=D*P+IC 38115 80850 100485 155232 249480
Minium Cost 46650 73750 100050 142400 197800
Conclusion
The above discussion makes it clear that the factors such as production costs, production
capacity, inventory costs and demand for the product in the market has an impact on the
production planning of the business. The management of the company therefore needs to take
any decisions considering these factors as to how the same have impacts on the profits which is

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generated by the business. The production planning process must consider these aspects as they
are related to the product production process and are important for determining the overall profits
which is generated by the business.
Reference
Afuah, A. (2014). Business model innovation: concepts, analysis, and cases. Routledge.
Han, S., Ma, W., Zhao, L., Zhang, X., Lim, M. K., Yang, S., & Leung, S. (2016). A robust
optimisation model for hybrid remanufacturing and manufacturing systems under
uncertain return quality and market demand. International Journal of Production
Research, 54(17), 5056-5072.
Hitomi, K. (2017). Manufacturing systems engineering: A unified approach to manufacturing
technology, production management and industrial economics. Routledge.

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Kaya, O., Bagci, F., & Turkay, M. (2014). Planning of capacity, production and inventory
decisions in a generic reverse supply chain under uncertain demand and
returns. International Journal of Production Research, 52(1), 270-282.
Maiti, T., & Giri, B. C. (2015). A closed loop supply chain under retail price and product quality
dependent demand. Journal of Manufacturing Systems, 37, 624-637.
Seyedhosseini, S. M., & Ghoreyshi, S. M. (2014). An integrated model for production and
distribution planning of perishable products with inventory and routing
considerations. Mathematical Problems in Engineering, 2014.
Shepherd, R. W. (2015). Theory of cost and production functions. Princeton University Press.
Song, S., Govindan, K., Xu, L., Du, P., & Qiao, X. (2017). Capacity and production planning
with carbon emission constraints. Transportation Research Part E: Logistics and
Transportation Review, 97, 132-150.