Question

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

QUARTER	DEMAND
1	1400
2	1200
3	1600
4	1500

Other information;

Previous Quarter's output	1300 units
Beginning Inventory	0 units
Stock out cost	$50 per unit
Inventory holding cost	$10 per unit at the end of the quarter
Hiring workers	$40 per unit
Laying off workers	$80 per unit
Subcontracting Cost	$60 per unit
Unit Cost	$30 per unit
Overtime	$15 extra per unit

Which of the following production plans is least costly?

A. Plan A–chase demand by hiring and layoffs;

B.Plan B–pure level strategy,

C. Plan C–1350 level with the remainder by subcontracting? (Show all your workings)

Answer 1

A. For chase strategy, inventory holding cost and stockout cost is 0 as we are just producing what is required. But we incur some hiring and lay off charges.

Hire units = Production units this quarter - Production unit last quarter (-ve value suggest layoff)

The total cost incurred in 4 quarters is 227210.

Chase strategy
	0	1	2	3	4
Demand	-	1400	1200	1600	1500
Production	1300	1400	1200	1600	1500
Subcontracted	-	0	0	0	0
Inventory on hand	0	0	0	0	0
Stockout	-	0	0	0	0
Hire	-	100	0	400	0
Layoff	-	0	200	0	100
Production Cost	-	42000	36000	48000	45000
Subcontract cost	-	0	0	0	0
Inventory holding cost	-	0	0	0	0
Stockout cost	-	0	0	0	0
Hiring cost	-	4000	0	16000	0
Layoff cost	-	0	16000	0	8000
TOTAL COST	48901	54602	67603	56104	227210

A. For level strategy, hiring and layoff cost is 0 as we are just producing what is required. But we incur some inventory holding and stock out charges.

Inventory on hand = Production - Demand (-ve value suggest stockout)

The total cost incurred in 4 quarters is 193510.

Level strategy
	0	1	2	3	4
Demand	-	1400	1200	1600	1500
Production	1300	1300	1300	1300	1300
Subcontracted	-	0	0	0	0
Inventory on hand	0	0	100	0	0
Stockout	-	100	0	200	200
Hire	-	0	0	0	0
Layoff	-	0	0	0	0
Production Cost	-	39000	39000	39000	39000
Subcontract cost	-	0	0	0	0
Inventory holding cost	-	0	1000	0	0
Stockout cost	-	5000	0	10000	10000
Hiring cost	-	0	0	0	0
Layoff cost	-	0	0	0	0
TOTAL COST	46801	42602	52103	52004	193510

In a level strategy reinforced with subcontracting, we will not incur stockout costs.

Subcontracted units = Demand - Inventory on hand fro last quarter - 1350

The total cost incurred in 4 quarters is 195110.

1350 level with rest subcontracted
	0	1	2	3	4
Demand	-	1400	1200	1600	1500
Production	1300	1350	1350	1350	1350
Subcontracted	-	50	0	100	150
Inventory on hand	0	0	150	0	0
Stockout	-	0	0	0	0
Hire	-	50	0	0	0
Layoff	-	0	0	0	0
Production Cost	-	40500	40500	40500	40500
Subcontract cost	-	3000	0	6000	9000
Inventory holding cost	-	0	1500	0	0
Stockout cost	-	0	0	0	0
Hiring cost	-	2000	0	0	0
Layoff cost	-	0	0	0	0
TOTAL COST	48351	44702	49553	52504	195110

Hence least cost is involved in level strategy. Option B.