Question

Consider the quarterly demand of 3500, 2600, 5500, 4400, for quarters 1,2,3,4, respectively, with a beginning annual inventory of 500 and an ending annual inventory of 500. Let the production standard be 250 items/quarter. Let the carrying cost be $5/item/quarter.

Question 1. For the aggregate planning strategies listed,

what are the correct production for quarter 1 and the annual average inventory?

	Select One Answer	Aggregate Planning Strategy	Production for Quarter 1	Average Annual Inventory
	A	Chase Demand	4000	1200
	B	Level Capacity	3500	500
	C	Chase Demand	3750	850
	D	Level Capacity	4000	1200
	E	None of the above

Answer 1

In the Chase demand strategy, the production is each quarter shall exactly match the final demand.

In Quarter 1, the demand is 3500 and the beginning inventory is 500.

So, Production in Quarter 1 = 3500 - 500 = 3000 units

Therefore, Option A and Option C are not correct as the Quarter 1 production in the options is not equal to 3000 units.

In the Level capacity strategy, the production in each quarter shall be the same.

The production shall be equal to the average demand in the 4 quarters.

So, Production in each quarter = ( 3500 + 2600 + 5500 + 4400) / 4 = 16000 / 4 = 4000 units

Hence, Option B is not correct as the Quarter 1 production in the option is not equal to 4000 units

Beginning inventory in Quarter 1 = 500 units

Ending Inventory in Quarter 1 = Beginning Inventory in Quarter 1 + Production in Quarter 1 - Demand in Quarter 1

= 500 + 4000 - 3500 = 1000 units

Similarly, the Beginning Inventory, Production, and Ending Inventory for each quarter are calculated as per the below table:

Quarter	Demand	Beginning Inventory	Production	Ending Inventory
1	3500	500	4000	1000
2	2600	1000	4000	2400
3	5500	2400	4000	900
4	4400	900	4000	500

Average Annual Inventory = Average of Ending Inventory = ( 1000 + 2400 + 900 + 5000) / 4 = 4800 / 4 = 1200 units

Also, Ending Annual Inventory = 500 units

Therefore Option D is the correct answer.

Quarter 1 Production = 4000 units

Average Annual Inventory = 1200 units