In: Accounting
Consider the quarterly demand of 3500, 2600, 5500, 4400, for quarters 1,2,3,4, respectively. Let the production standard be 250 items/quarter. Let the carrying cost be $5/item/quarter.
If the beginning annual inventory is 500 but the ending annual inventory objective is 620,
then what is the total annual carrying cost for the aggregate planning strategies listed?
Select One Answer |
Aggregate Planning Strategy |
Total Annual Carrying Cost |
|
A |
Level Capacity |
25500 |
|
B |
Chase Demand |
11200 |
|
C |
Level Capacity |
6375 |
|
D |
Chase Demand |
11500 |
|
E |
None of the above |
Chase Strategy: Production Matches Demand
The chase strategy refers to the notion that you are chasing the demand set by the market. Production is set to match demand and doesn't carry any leftover products. This is a lean production strategy, saving on costs until the demand – the order – is placed. Inventory costs are low, and the cost of goods for products sold is kept to a minimum and for a shorter length of time.
The chase strategy is common in industries where perishables are an issue or with a company that doesn't have a lot of extra cash on hand and doesn't want the added risks of loss, theft or unsold products. The production schedule is based on orders and immediate demand.
Level Production: Constant Production Over Time
As the title suggests, level production is a strategy that produces the same number of units equally. This is common in industries where demand is cyclical and production capabilities are limited or capped. For example, assume a manufacturing plant can only produce 10,000 calculators per month.
In the given case the opening inventory is 500 Units and the Closing Inventory is 620 Units. Demand for the product is fluctuating in each quarter.
We can conclude that it is an chase starategy as -
1. As the opening inventory and closing inventory are not varying much we can say that the production are set to match the expected demand.
2.Here the demand is not constant , we can conclude that the production is also not constant and hence it is not a level production starategy.
Carrying Cost = Average Inventory * carrying cost per unit per period* no. of period
Average Inventory= (Opening Inventory + Closing Inventory)/ 2
=> Average Inventory= (500+620)/2 =560 units
Carrying Cost = 560 units * $5 per period * 4 Period = $11200
Hence Correct Option = B = CHASE DEMAND = Carrying cost $11200