Question

1. The S&OP team at Kansas Furniture, has received the following estimates of demand requirements Assuming one-time stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis:
   • Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and subcontract additional units at a $60 per unit premium cost.
   • Plan B: Vary the workforce, to produce the prior month’s demand. The firm produced 1,300 units in June. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.

Note: Both hiring and layoff costs are incurred in the month of the change, (i.e. going from production of 1,300 in July to 1,000 in August requires a layoff (and related costs) of 300 units in August, just as going from production of 1,000 in August to 1,200 in September requires hiring (and related costs) of 200 units in September).

Answer 1

To make a comparative analysis, we will do a comparative cost analysis :

Plan A:

Month	Demand units	Production units	EOP Inventory	SCU	IC	SC
June		1000
July	1000	1000	0	0	0	0
August	1200	1000	0	200	0	12000
September	1400	1000	0	400	0	24000
October	1800	1000	0	800	0	48000
November	1800	1000	0	800	0	48000
December	1600	1000	0	600	0	36000
				Total Cost		$ 168000

Total Cost = $ 168000

where EOP = End of Period

SCU =Sub Contract Units

IC = Inventory Cost

SC = SubContract Cost

Plan B:

Month	Demand Units	Production Units	Hire Units	Layoff Units	Hire Cost	Layoff Cost
June		1300
July	1000	1000	0	300	0	18000
August	1200	1200	200	0	6000	0
September	1400	1400	200	0	6000	0
October	1800	1800	400	0	12000	0
November	1800	1800	0	0	0	0
December	1600	1600	0	200	0	12000
				Total Cost	24000	30000

Hence the Total Cost in case of Plan B = 24000+30000= 54000 $

As we can see the total cost is less in Plan B which is 54000 $ as to compared to Plan A where the total cost is 168000 $ . Hence Plan B is better as compared to Plan A.