Abstract
We propose a nonsmooth dynamic system integrating production and inventory where the items may deteriorate and the demand is stock-dependent. We aim to derive the optimal production rate. In our first model, backorders are not allowed, while in the second model they are. Using optimal control, necessary optimality conditions are obtained for general forms of the cost, demand, and deterioration rates and closed form solutions are derived for specific forms of these rates. Numerical simulations are presented and sensitivity of the solutions are examined.