Question

Manager T. C. Downs of Plum Engines, a producer of lawn mowers and leaf blowers, must develop an aggregate plan given the forecast for engine demand shown in the table. The department has a regular output capacity of 140 engines per month. Regular output has a cost of $65 per engine. The beginning inventory is zero engines. Overtime has a cost of $115 per engine.

Month 1 2 3 4 5 6 7 8

Total Forecast 130 135 130 143 130 135 135 134 1,072

b. Compare the costs to a level plan that uses inventory to absorb fluctuations. Inventory carrying cost is $3 per engine per month. Backlog cost is $135 per engine per month. There should not be a backlog in the last month. Set regular production equal to the monthly average of total forecasted demand. Assume that using overtime is not an option. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round average inventory row, Inventory cost row, and Total row values to 1 decimal.)

Answer 1

The level strategy is given below in the table :

Given :

Regular production = Monthly average of total forecasted demand

	MONTH
	1	2	3	4	5	6	7	8	Total
Forecast	130	135	130	143	130	135	135	134	1072

Hence regular production = 1072/8 = 134 engines per month

Also given:

Regular output cost = $65 per engine

Inventory carrying cost = $3 per engine per month

Backlog cost = $135 per engine per month

The level plan costs are calculated as = 69995 $

The formula for average inventory is : (Begining Inventory + Ending Inventory )/2

Backlog formula = Maximum of {0, (Forecasted Production + Previous term backlog) - Available inventory}

where available inventory is given as :

Available Inventory =  Beginning-Inventory + Total-Output