Modelling the effect of demand variations on a production system manufacturing multiple products is discussed. The various system costs involved in the production system, namely set-up cost and inventory cost incurred due to change in demands for the products with respect to products and planning periods are estimated. A statistical modelling is presented for determining the production capacity and inventory level requirement to satisfy the customer to a certain level decided by the management. Two important factors, (i) number of types of products and (ii) multiple planning horizons are considered to identify the costs as well as the production capacity and inventory level requirements. A statistical method, analysis of variance (ANOVA) is used to study the variations in the demands and costs involved. Finally, an example is presented to explain the application and the behaviour of the statistical model.