We are formulating an aggregate plan for an 8-quarter period. Our demand forecas

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 $12 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 $60.

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 160 280 360 240 180 300 380 260

Explanation / Answer

So the total of 2160 is produced as part of a level plan in 8 quarters, so 2160/8 = 270 units per quarter

SO the theoretical calculation:

If we reduce the negative holding cost:

Quarter 1 2 3 4 5 6 7 8 Total Demand 160 280 360 240 180 300 380 260 2160

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