Question

1) Eagle Fabrication has the following aggregate demand requirements and other data for the upcoming four quarters.

Quarter	Demand	Previous quarter's output	1500 units
1	1400	Beginning inventory	200 units
2	1000	Stockout cost	$50 per unit
3	1500	Inventory holding cost	$8 per unit at end of quarter
4	1300	Hiring workers	$5 per unit
		Laying off workers	$10 per unit
		Unit cost	$30 per unit
		Overtime	$10 extra per unit

Which of the following production plans is better: Plan A—chase demand by hiring and layoffs; or

Plan B—produce at a constant rate of 1200 and obtain the remainder from overtime?

Finish the calculation and show all work!

Plan A:

                                               Eagle Fabrication Solution

	Demand	Regular Time Capacity	Regular Time Production	Hire	Fire
Initial Inventory
Period 1	1,400	1200
Period 2	1,000
Period 3	1,500
Period 4	1,300
Total (units)	5,200
			@$30/unit	@$5/unit	@$10/unit
Subtotal Costs			$??????	$????	$????
Total Cost	$??????

Plan B:

                                             Eagle Fabrication Solution

	Demand	Regular Time Capacity	Overtime Capacity	Regular Time Production	Overtime Production	Inventory (end PD)	Fire
Initial Inventory						200.
Period 1	1,400	1,200
Period 2	1,000
Period 3	1,500
Period 4	1,300
Total (units)	5,200
				@$30/unit	@$30+@$10 = @$40/unit	@$8/unit	@$10/unit
Subtotal Costs				$??????	$????	$????	$????
Total Cost	$??????

Answer:

Answer 1

Plan A
	Demand	Inventory	Stockout	Regular Time Capacity	Regular time Production	Hire	Fire
Period 1	1400	200	0	1200	1200	0	0
Period 2	1000	0	0	1000	1000		200
Period 3	1500	0	0	1500	1500	500	0
Period 4	1300	0	0	1300	1300	0	200
Total	5200	200	0	5000	5000	500	400
Unit Cost					$            30.00	$             5.00	$           10.00
Subtotal Cost					$1,50,000.00	$     2,500.00	$     4,000.00
Total Cost	$1,56,500.00

Regular time Capacity = Demand - Inventory

Hire/ Fire = Absolute difference between Regular Time Capacity of current period and immediate last period.

Plan B
	Demand	Beginning Inventory	Regular Time Capacity	Overtime Capacity	Regular time Production	Overtime Production	End Inventory
Period 1	1400	200	1200	200	1200	0	0
Period 2	1000	0	1200	0	1200	0	200
Period 3	1500	200	1200	100	1200	100	0
Period 4	1300	0	1200	100	1200	100	0
Total	5200	400	4800		4800	200	200
Unit Cost					$            30.00	$ 40.00	$ 8.00
Subtotal Cost					$1,44,000.00	$     8,000.00	$ 1,600.00
Total Cost	$1,53,600.00

Regular time capacity is constant in this Plan at 1200.

Overtime Capacity = Demand - Beginning Inventory - Regular time Capacity

Regular time production = Regular time capacity

Overtime production = Overtime capacity

End Inventory (only if Regular time production > Demand) = Regular time production - Demand

Comparing total cost of both plan, we can say that Plan B is better than Plan A.