Concept explainers
A company produces to a seasonal demand, with the
- a. What is the cost of carrying inventory for the month of January for the level strategy?
- b. What is the total cost of the level strategy including regular time, inventory carrying cost and changes in production level?
- c. What is the total cost of the chase strategy?
a)
To determine: The inventory carrying cost for the month of January for the level strategy.
Introduction:
The aggregate plan is the output of sales and operations planning. The major concern of aggregate planning is the production time and quantity for the intermediate future. There are three kinds of aggregate planning; they are level strategy, chase strategy, and mixed strategy.
Explanation of Solution
Given information:
The present labor force can produce 500 units per month, and the demand with the forecast for the next 12 months is given below:
Month | Demand |
J | 651 |
F | 700 |
M | 850 |
A | 702 |
M | 650 |
J | 500 |
J | 600 |
A | 850 |
S | 803 |
O | 900 |
N | 703 |
D | 600 |
Each employee can produce 20 units per month and is paid $2,000 per month. Inventory carrying cost is given as $50 per unit per year. Changes in the production level is $100 per unit during line changeover costs, hiring, and layoffs. Initial inventory is given as 200 units.
Determine the inventory for 12 months:
Month | Demand | Production | Inventory |
J | 651 | 709.08 | 258.08 |
F | 700 | 709.08 | 267.17 |
M | 850 | 709.08 | 126.25 |
A | 702 | 709.08 | 133.33 |
M | 650 | 709.08 | 192.42 |
J | 500 | 709.08 | 401.50 |
J | 600 | 709.08 | 510.58 |
A | 850 | 709.08 | 369.67 |
S | 803 | 709.08 | 275.75 |
O | 900 | 709.08 | 84.83 |
N | 703 | 709.08 | 90.92 |
D | 600 | 709.08 | 200.00 |
Total | 8509 | 8509.00 | 2910.50 |
Computation of inventory for 12 months:
Determine the cost of carrying inventory for the month of January for the level strategy:
It is calculated by multiplying the inventory for the month of January (refer table), and the value is attained by dividing inventory carrying cost and number of months.
Hence, the inventory carrying cost is $1,075.33.
b)
To determine: The total cost of level strategy.
Introduction:
The aggregate plan is the output of sales and operations planning. The major concern of aggregate planning is the production time and quantity for the intermediate future. There are three kinds of aggregate planning; they are level strategy, chase strategy, and mixed strategy.
Explanation of Solution
Given information:
The current labor force can produce 500 units per month, and the demand with the forecast for the next 12 months is given below:
Month | Demand |
J | 651 |
F | 700 |
M | 850 |
A | 702 |
M | 650 |
J | 500 |
J | 600 |
A | 850 |
S | 803 |
O | 900 |
N | 703 |
D | 600 |
Each employee can produce 20 units per month and is paid $2,000 per month. Inventory carrying cost is given as $50 per unit per year. Deviations in the production level is $100 per unit during line changeover costs, hiring, and layoffs. Initial inventory is given as 200 units.
Determine the regular time cost:
It is calculated by multiplying production units, number of months, and changes in the production level cost.
Hence, the regular time cost is $850,896.
Determine the inventory carrying cost:
It is computed by multiplying the sum of inventory (refer table), and the value is attained by dividing inventory carrying cost and number of months.
Determine the change in production level:
It is calculated by multiplying the changes in the production line and the difference between regular production per month and the calculated production.
Determine the total cost of level strategy:
It is calculated by adding regular time cost, inventory carrying cost, and change in production level cost.
Hence, the total cost of level strategy is $883,923.08.
c)
To determine: The total cost of chase strategy.
Introduction:
The aggregate plan is the output of sales and operations planning. The major concern of aggregate planning is the production time and quantity for the intermediate future. There are three kinds of aggregate planning; they are level strategy, chase strategy, and mixed strategy.
Explanation of Solution
Given information:
The current labor force can produce 500 units per month, and the demand with the forecast for the next 12 months is given below:
Month | Demand |
J | 651 |
F | 700 |
M | 850 |
A | 702 |
M | 650 |
J | 500 |
J | 600 |
A | 850 |
S | 803 |
O | 900 |
N | 703 |
D | 600 |
Each employee can produce 20 units per month and is paid $2,000 per month. Inventory carrying cost is given as $50 per unit per year. Changes in the production level is $100 per unit during line changeover costs, hiring, and layoffs. Initial inventory is given as 200 units.
Determine the inventory for 12 months:
Month | Demand | Production | Inventory | Change in production level |
J | 651 | 651 | 200 | 151 |
F | 700 | 700 | 200 | 49 |
M | 850 | 850 | 200 | 150 |
A | 702 | 702 | 200 | 148 |
M | 650 | 650 | 200 | 52 |
J | 500 | 500 | 200 | 150 |
J | 600 | 600 | 200 | 100 |
A | 850 | 850 | 200 | 250 |
S | 803 | 803 | 200 | 47 |
O | 900 | 900 | 200 | 97 |
N | 703 | 703 | 200 | 197 |
D | 600 | 600 | 200 | 103 |
Total | 8509 | 8509 | 2400 | 1494 |
Computation of inventory for 12 months:
Determine the regular time cost:
It is computed by multiplying production units, number of months, and changes in the production level cost.
Hence, the regular time cost is $850,900.
Determine the inventory carrying cost:
It is calculated by multiplying the sum of inventory (refer table), and the value is attained by dividing inventory carrying cost and number of months.
Determine the change in production level:
It is calculated by multiplying the sum of changes in the production level and cost of change in production line.
Determine the total cost of chase strategy:
It is calculated by adding regular time cost, inventory carrying cost, and change in production level cost.
Hence, the total cost of chase strategy is $1,010,300.
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Chapter 11 Solutions
OPERATIONS MANAGEMENT IN THE SUPPLY CHAIN: DECISIONS & CASES (Mcgraw-hill Series Operations and Decision Sciences)
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