Question

Wormwood, Ltd., produces a variety of furniture products. The planning committee wants to prepare an aggregate plan for the next six months using the following information: MONTH 1 2 3 4 5 6 Demand 160 150 160 180 170 140 Capacity Regular 150 150 150 150 160 160 Overtime 10 10 0 10 10 10 Cost Per Unit Regular time $ 50 Overtime 75 Subcontract 80 Inventory, per period 4 Subcontracting can handle a maximum of 10 units per month. Beginning inventory is zero. Develop a plan that minimizes total cost. No back orders are allowed. Regular production and overtime production can be less than capacity in any month. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) Period 1 2 3 4 5 6 Total Forecast 160 150 160 180 170 140 960 Output Regular Overtime Subcontract Output- Forecast Inventory Beginning Ending Average Backlog Costs: Regular $ $ Overtime Subcontract Inventory Backlog Total $ $

Answer 1

The known data is given below:

Demand and Capacity

Regular time cost =$50 per unit

Overtime cost =$75 per unit

Subcontracting cost =$80 per unit

Inventory holding cost =$4 per unit per period on average inventory

Backorders = Not allowed

Maximum subcontracting =10 units per period

(a)The amount of overtime and subcontracting needed is 70 units (350-280).

Create aggregate plan using the preceding information and following methodology as shown below:

Additional Objectives: Planned inventory at the end should be zero and all demand must be satisfied without backorders (zero backorders).

Manual method (For explanation only):

1. Calculate inventory as: Ending inventory equals beginning inventory plus or minus quantity output minus forecast. If output minus forecast is negative decrease inventory in that period by that amount.

2. Calculate Backlog as: If insufficient inventory exists, backlog will be equal to the shortage amount which must be taken care by subsequent output.

3. Overtime: Schedule overtime whenever there are backorders or regular capacity is unable to fulfill demand, keeping in mind that maximum overtime is restricted as mentioned in given data table.

4. Subcontracting: Schedule subcontracting only when overtime of previous period and current period is not able to control backorders (avoid inventory carrying cost).

5. Calculate cost: by multiplying the output, inventory, overtime and backorder units by respective unit costs as shown in excels.

Spreadsheet: Apply formulas as shown below to get the aggregate plan as shown below:

Formulas:

Aggregate Plan with Subcontracting, Overtime and Inventory

The total cost is $50,720