We are formulating an aggregate plan for an 8-quarter period. Our demand forecas
ID: 410601 • Letter: W
Question
We are formulating an aggregate plan for an 8-quarter period. Our demand forecast is as follows:
We will enter Quarter 1 with 0 units in inventory.
Inventory holding cost is charged as $8 per quarter per unit in average inventory. If, for example, in a given quarter Beginning Inventory was -10 units and Ending Inventory was +20 units, average inventory would be +5 units, so holding cost in that quarter would be $40.
If in a given quarter we wind up with negative Ending Inventory, we charge ourselves $60 per unit in backorder cost. This only applies to Ending Inventory.
If we used a level planning approach in this instance, what would our total (Holding + Backorder) cost be?
Quarter 1 2 3 4 5 6 7 8 Forecast 210 330 410 290 190 310 390 270Explanation / Answer
Following table presents various costs associated with following of Level strategy.
In level strategy , order quantity and hence “Quantity Received” has to be uniform.
The total value of forecasts for 8 months = 2400
Thus, quantity to be ordered each month ( i.e. Quantity Received ) = 2400/ 8 = 300
Quarter
1
2
3
4
5
6
7
8
Forecast
210
330
410
290
190
310
390
270
Quantity received
300
300
300
300
300
300
300
300
Opening Inventory
0
90
60
-50
-40
70
60
-30
Ending Inventory
90
60
-50
-40
70
60
-30
0
Average inventory
45
75
5
-45
15
65
15
-15
Inventory holding cost (@$8/ unit)
360
600
120
520
0
Backorder cost ( @$60 per unit of ending inventory)
3000
2400
1800
Cumulative Inventory holding cost ($) = 360 + 600 + 120 + 520 = $1600
Cumulative Backorder cost = $3000 + $2400 + $1800 = $7200
Thus, total cost = Cumulative Holding cost + Cumulative Backorder cost = $1600 + $7200 = $8800
TOTAL COST = $8800
Quarter
1
2
3
4
5
6
7
8
Forecast
210
330
410
290
190
310
390
270
Quantity received
300
300
300
300
300
300
300
300
Opening Inventory
0
90
60
-50
-40
70
60
-30
Ending Inventory
90
60
-50
-40
70
60
-30
0
Average inventory
45
75
5
-45
15
65
15
-15
Inventory holding cost (@$8/ unit)
360
600
120
520
0
Backorder cost ( @$60 per unit of ending inventory)
3000
2400
1800
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.