VALUING FIXED PRICE SUPPLY CONTRACTS

This article considers the problem of valuing a supply contract that r equires the manufacturer to deliver fixed quantities of a product acco rding to a predetermined schedule at fixed prices. Given that the raw material costs fluctuate randomly, the producer has capacity constrain ts, production costs depend on production rates, and that switching pr oduction rates result in additional charges, the problem is to establi sh an optimal production and inventory policy such that the schedule i s met, and the value of the contract to the firm is maximized.