Question

. Manufacturing Aggregate Planning. Manufacturers Inc. (MI) currently has a labor force of 10, which can produce 500 units per period. The cost is now $2,400 per period, per employee. The company has a long-standing rule that does not allow overtime. In addition, the product cannot be subcontracted due to the specialized machinery that MI uses to produce it. As a result, MI can only increase/decrease production by hiring or laying off employees. The cost is $5,000 to hire an employee and $5,000, to lay off an employee. Inventory-carrying costs are $100 per unit remaining at the end of each period. The inventory level at the beginning of period 1 is 300 units. The forecast demand in each period is given in the table below:

Period 1 Period 2 Period 3

   Aggregate Demand 610 510 420

a. Compute the costs of the chase strategy.

b. Compute the cost for a level strategy.

c. Compare the two strategies.

Answer 1

Ans a)

In a Chase Strategy, we need to maintain the no. of workers as minimum as possible. In a way, it makes our system flexible.

Step 1: Calculate Required Production

Step 2: No. of Workers Required = Required Production / 50 (Roundup this number to get the no. of workers)

Step 3: Calculate the no, of hiring and laying offs

Step 4: Production = No. of workers required * 50

Step 5: Ending Inventory = Production - Required Production

After finding above numbers for all 3 periods, calculate the costs.

Production Cost = No. of Workers * 2400

Hiring Cost = Hiring * 5000

Laying off Cost = Firing * 5000

Inventory Cost = Ending Inventory * 100

Total Cost for Chase Strategy = 108000

Ans b)

For level strategy, Level of no. of workers remain same for all 3 periods.

To find the no. of workers required, we need to find the Average Demand of Production for three months.

Note: Demand for period 1 is 610 but we also have beginning inventory of 300 so Required production for Period 1 is 310

Average Demand = (310 +510 + 420) /3 = 414

No. of workers Required = 414/50 ~ 9

Other calculation remains same as we did in Chase Strategy

Total Cost of Level Strategy = 102800

Ans C)

Total Cost of Level Strategy is less than the total cost of Chase strategy as the cost of Hiring and Laying off is relatively higher than cost of Inventory holding.