Question

The ABC Company has the following demand data (highlighted in green) for the last 2 years of sales for all models of their popular ToyPop product (in units):
- The company currently has five employees on the ToyPop line, each capable of producing approximately two ToyPops per day (assume 25 days per month).
- Hiring and layoff are not considered for Year 2018.
- The employees each earn $20 per hour for the standard 8-hour day, with $10 extra per hour premium for each hour of overtime.
- They can subcontract the production of the polybob, but to do so costs them $42 per unit above the standard cost.
- They can use inventory, but inventory holding costs are $25 per month per unit, based on the number of units in inventory at the end of the month. They have room for only 200 units in inventory, after which they must use a public storage facility, which adds another $15 per month to the inventory holding cost.
- Backorder cost is $150 per month per unit.
- They currently have (as of the end of December 2017) 29 units in inventory.

Number of employees	5 employees
Production rate/employee/day	2 units
Number of days/month	25 days
Regular production cost/hour	$20
Number of regular hours/day	8 hours
Overtime premium/hour	$10
Overtime capacity/month/employee	5 days
Subcontracting premium/unit	$42
Holding cost/month/unit	$25
Inventory storage capacity	200 units
Public storage holding cost premium	$15
Beginning inventory	29 units
Backorder cost/unit	$150

Month	2016 demand	2017 demand
January	232	254
February	301	325
March	422	398
April	355	369
May	296	324
June	288	298
July	233	255
August	194	242
September	274	256
October	244	266
November	221	235
December	247	249

(a) Use the 2016 and 2017 demand data to develop a forecast for 2018 annual demand (month by month) (fill in cells G6 to S6).
Assume the ABC Company uses the simple moving average method.

(b) Use your 2018 forecast data to develop a "best" aggregate plan (SOP) using the Level Capacity strategy. Start the planning from calculating the following parameters

1. What is the number of hours needed for producing one unit of Toypop?

  2. What is the regular production cost per unit?

  3. What is the maximum overtime capacity per month?

  4. What is the overtime cost per unit?

  5. What is the subcontracting cost per unit?

Assuming the inventory at the end of the planning period (i.e., end of Dec.) should be as low as possible, fill in the following table

	January	February	March	April	May	June	July	August	September	October	November	December	Total	Costs
2018 demand
Regular capacity
Overtime capacity
Subcontracting capacity
												Total production quantity
Ending inventory
Backorder quantity
Inventory (internal)
Inventory (public storage)
													Total cost

Answer 1

No of employees	5
Production per day per worker	2
No. of working days in a month	25
Total Production	250

1. What is the number of hours needed for producing one unit of Toypop?
Production per day per worker	2
Std hrs per day	8
Number of hours needed to produce 1 toypop = 8hrs/2 units = 4 hours
Therefore, 4 hours will be needed to produce 1 toypop.

2. What is the regular production cost per unit?

No. of hours needed to produce 1 toypop

4 hours

As taken from solution 1

Production cost per hour

20 per hour

Given

Regular production cost per unit

80

4 hours * $20 per hour

Note- Backorder cost and storage cost will not be part of production cost

3. What is the maximum overtime capacity per month?

Overtime capacity/month/employee

5 days

No. of employees

5

Max number of hours in a day to be worked overtime (24 hours - 8 standar hours)

16

Total overtime capacity per month (No. of employees * No. of working days * Overtime hours)

400

hours

Total overtime capacity per month (in units)    {Total hours/ No of hours for 1 product}

100

units

Note- In absence of given information, we have assumed 16 hours overtime working

4. What is the overtime cost per unit?

To produce 1 product in overtime, we need 4 hours. Overtime premium is 10 $. So total cost ofproduction will be (20 + 10)* 4 hours = 120 $

5. What is the subcontracting cost per unit?

As per the given information, subcontracting cost is $ 42 above the standard cost per product. Total cost of production will be $ 80 + $ 42 = $122

Note we assume standard cost to be same as production cost. Alternatively, we can subtract the labour cost if it is given separately.