10. Management at the Kerby Corporation has determined the following aggregated

Question

10. Management at the Kerby Corporation has determined the following aggregated demand schedule (in units) Month Demand 500 800 1,000 1,400 2,000 3,000 2,700 1,500 1,400 1,500 2,000 1,200 4 6 10 11 12 An employee can produce an average of 10 units per month. Each worker on the payroll costs $2,000 in regular time wages per month. Undertime is paid at the same rate as regular time. In accordance to labor contract in force, Kerby Corp, does not work overtime or use subcontracting Kerby can hire and train a new employee for $2,000 and lay off one for $500. Inventory costs $32 per unit on hand at the end of each month. At present 140 employees are on payroll, and current inventory is zero a. Prepare a production plan using a chase strategy, relying only on hiring and layoffs. What is the total cost of this plan? Prepare a production plan that only uses level workforce. Layoffs, undertime, vacation, subcontracting, backorders, and stockout are not options. What is the total cost of this plan? (Hint: Use Ms. Excel to calculate the minimum number of employees needed that can satisfy demand for every month by main Leftover inventory from previous month can roll over the following month. Make sure you check ending inventory at each month. End inventorybegin inventory demand, while begin invteiend invrtproductiont.) b.

Explanation / Answer

A Chase strategy has the total cost of production $4,523,000 and Uses Level workforce (at 163 employees) has cost of production $4,351,680. Therefore Uses Level workforce strategy is better strategy with minimum cost.

a. Chase strategy Total Cost calculation of the Plan Period 1 2 3 4 5 6 7 8 9 10 11 12 Total Forecast 500 800 1,000 1,400 2000 3000 2,700 1500 1400 1500 2000 1200 19,000 Beginning Inventory 0 400 500 400 0 0 0 0 0 100 100 0 Production Required (forecast -Inventory) 500 400 500 1,000 2,000 3,000 2,700 1,500 1,400 1,400 1,900 1,200 Present employees 140 90 90 90 100 200 300 270 150 150 150 190 Hiring 0 0 0 10 100 100 0 0 0 0 40 0 Layoff 50 0 0 0 0 0 30 120 0 0 0 70 Total employees 90 90 90 100 200 300 270 150 150 150 190 120 Total Production 900 900 900 1,000 2,000 3,000 2,700 1,500 1,500 1,500 1,900 1,200 19,000 Ending Inventory 400 500 400 0 0 0 0 0 100 100 0 0 Cost: Regular employees ($2000/employee) $280,000 $180,000 $180,000 $180,000 $200,000 $400,000 $600,000 $540,000 $300,000 $300,000 $300,000 $380,000 $3,840,000 Hiring cost ($2000/employee) $0 $0 $0 $20,000 $200,000 $200,000 $0 $0 $0 $0 $80,000 $0 $500,000 Layoff cost ($500/employee) $25,000 $0 $0 $0 $0 $0 $15,000 $60,000 $0 $0 $0 $35,000 $135,000 Inventory holding cost ($32/unit per period) $12,800 $16,000 $12,800 $0 $0 $0 $0 $0 $3,200 $3,200 $0 $0 $48,000 Total Cost per period $317,800 $196,000 $192,800 $200,000 $400,000 $600,000 $615,000 $600,000 $303,200 $303,200 $380,000 $415,000 $4,523,000 b. Uses Level workforce Period 1 2 3 4 5 6 7 8 9 10 11 12 Total Forecast 500 800 1,000 1,400 2000 3000 2,700 1500 1400 1500 2000 1200 19,000 Beginning Inventory 0 1,130 1,960 2,590 2,820 2,450 1,080 10 140 370 500 130 Production Required (forecast -Inventory) 500 -330 -960 -1,190 -820 550 1,620 1,490 1,260 1,130 1,500 1,070 Present employees 163 163 163 163 163 163 163 163 163 163 163 163 Hiring 0 0 0 0 0 0 0 0 0 0 0 0 Layoff 0 0 0 0 0 0 0 0 0 0 0 0 Total employees 163 163 163 163 163 163 163 163 163 163 163 163 Total Production 1,630 1,630 1,630 1,630 1,630 1,630 1,630 1,630 1,630 1,630 1,630 1,630 19,560 Ending Inventory 1,130 1,960 2,590 2,820 2,450 1,080 10 140 370 500 130 560 Cost: Regular employees ($2000/employee) $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $326,000 $3,912,000 Hiring cost ($2000/employee) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Layoff cost ($500/employee) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Inventory holding cost ($32/unit per period) $36,160 $62,720 $82,880 $90,240 $78,400 $34,560 $320 $4,480 $11,840 $16,000 $4,160 $17,920 $439,680 Total Cost per period $362,160 $388,720 $408,880 $416,240 $404,400 $360,560 $326,320 $330,480 $337,840 $342,000 $330,160 $343,920 $4,351,680

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