The president of Hill Enterprises, Terri Hill, projects the firm\'s aggregate de
ID: 376199 • Letter: T
Question
The president of Hill Enterprises, Terri Hill, projects the firm's aggregate demand requirements over the next 8 months as follows 1,400 1,600 1,700 1,800 2,200 2,100 1,700 1,300 May June January February March April August Her operations manager is considering a new plan, which begins in January with 200 units of inventory on hand. Stockout cost of lost sales is $65 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. Evaluate the following plans D and E. Plan D: Keep the current workforce stable at producing 1,600 units per month. In addition to the regular production, another 20% of the normal production units can be produced in overtime at an additional cost of $55 per unit. A warehouse now constrains the maximum allowable inventory on hand to 600 units or less Note: Do not produce in overtime if production or inventory are adequate to cover demand.Explanation / Answer
Inventory carrying cost is $20 per unit per month, Shortage cost is $65 per unit, Additional cost for OT production is $55 per unit, therefore among the three costs minimum is inventory carrying cost that favour to carry inventory in place of OT production and or to have shortages. But inventory carrying plus OT additional (55+20) is more than stockout cost of $65. So better to have stockout rather than producing in OT and holding from the previous month/s.
Difference between Total demand and Total Regular production is 1000 (13800-12800) out of which 200 are on hand, therefore total OT production required is 800 (1000-200) units. Maximum OT production in a month is 320 (20% of regular) and warehouse can hold maximum 600 units.
Maximum demand is for month May followed by June that needs special attention to meet demand.
The calculations are as follows to fill in the blanks in the given table:
Total inventory carrying cost on the basis of ending inventory is $30,000
Total Stockouts cost is $23,400
Total additional OT production cost is $40,700
Total of all above costs is $93,400
Month Demand Production OT Prod. End Inv. Stockouts Costs-Inv@20, OT@55, S@65 December 200 Inv.Carry OT-Prod. Stockout January 1400 1600 0 400 0 8000 0 0 February 1600 1600 0 400 0 8000 0 0 March 1700 1600 0 300 0 6000 0 0 April 1800 1600 0 100 0 2000 0 0 May 2200 1600 320 0 180 0 17600 11700 June 2100 1600 320 0 180 0 17600 11700 July 1700 1600 100 0 0 0 5500 0 August 1300 1600 0 300 0 6000 0 0 Total 13800 12800 30000 40700 23400Related Questions
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