The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate dem

Question

The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate demand requirements over the next 8 months as follows:
Jan. 1,400 May 2,200
Feb. 1,600 June 2,200
Mar. 1,800 July 1,800
Apr. 1,800 Aug. 1,400
* POM for Windows and/or Excel OM.
Her operations manager is considering a new plan, which begins in January with 200 units on hand. Stockout cost of lost sales is $100 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. The plan is called plan A.
Plan A: Vary the workforce level to execute a “chase” strategy by producing the quantity demanded in the prior month. The December demand and rate of production are both 1,600 units per month. The cost of hiring additional workers is $5,000 per 100 units. The cost of laying off workers is $7,500 per 100 units. Evaluate this plan.

Explanation / Answer

Total cost for the plan is $140,000. Note that we do not attempt to include the costs of production – we assume that production costs are the same between all three plans and can therefore be cancelled out in any comparison. Also note that in January, we must incur the firing cost to move from a production level of 1600 to one of 1200.

Month Demand Production Hire Fire Cost Dec 1600 Jan 1400 1200 400 $30,000 Feb 1600 1600 400 $20,000 Mar 1800 1800 200 $10,000 Apr 1800 1800 $0 May 2200 2200 400 $20,000 Jun 2200 2200 $0 Jul 1800 1800 400 $30,000 Aug 1400 1400 400 $30,000 Total Cost
$140,000

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