This thesis deals with a repairable item inventory system that has both a production and a repair facility. It is assumed that repairable items are returned not only from the user but also from the production facility. The items returned from the production facility can be repaired as good as new items. The items returned from the user, however, may or may not be repaired as good as new. The optimal quantity to be produced and optimal time for repair minimizing overall inventory cost are obtained.