Osprey Fabrication has the following aggregate demand requirements and other dat
ID: 379469 • Letter: O
Question
Osprey Fabrication has the following aggregate demand requirements and other data for the upcoming four quarters.
Quarter
Demand
Previous quarter's output
1300 units
1
1000
Beginning inventory
0 units
2
1200
Stockout cost
$50 per unit
3
1600
Inventory holding cost
$10 per unit at end of quarter
4
1500
Hiring workers
$40 per unit
Firing workers
$80 per unit
Subcontracting cost
$60 per unit
Unit cost
$30 per unit
Overtime
Idle time cost
$15 extra per unit
$20
Which of the following production plans is better: Plan A—chase demand by hiring and firing. Which chase method is more cost effective? Explain. Plan B—smooth production (average gross demand), or Plan C—1300 level with the remainder by overtime. Maximum capacity for overtime is 200 units. Warehouse limitation is 200 units.
Quarter
Demand
Previous quarter's output
1300 units
1
1000
Beginning inventory
0 units
2
1200
Stockout cost
$50 per unit
3
1600
Inventory holding cost
$10 per unit at end of quarter
4
1500
Hiring workers
$40 per unit
Firing workers
$80 per unit
Subcontracting cost
$60 per unit
Unit cost
$30 per unit
Overtime
Idle time cost
$15 extra per unit
$20
Explanation / Answer
Plan A
Since the Idle time cost is less than firing cost, it is better to keep people even at an idle time than firing them.
Plan B
Average gross demand = 1325
Plan C
This is infeasible because the first quarter production is 1000. The production level is at 1300. So, the ending inventory becomes 1300+0 - 1000 = 300 units. But the warehouse capacity is 200 units only. If we remove the warehouse capacity restriction, the plan becomes -
Quarter Demand Production Hire Fire Overtime Subcont. EndingInventory Stockout Idle time 0 1300 0 1 1000 1000 0 0 0 0 0 0 300 2 1200 1200 0 0 0 0 0 0 100 3 1600 1600 300 0 0 0 0 0 0 4 1500 1500 0 0 0 0 0 0 100 Cost Estimates Quarter Prod Hire Fire OT SubC Inventory Stockout Idle time Total 1 30000 0 0 0 0 0 0 6000 36000 2 36000 0 0 0 0 0 0 2000 38000 3 48000 12000 0 0 0 0 0 0 60000 4 45000 0 0 0 0 0 0 2000 47000 $ 181,000
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