A key hospital supplier, IVs Plus (IVP) located in Salina, KS sells IV tubing an
ID: 442717 • Letter: A
Question
A key hospital supplier, IVs Plus (IVP) located in Salina, KS sells IV tubing and stands to hospitals and clinics. Sales have picked up ever since they introduced their newest “Squeaky Clean” IV stand, which eliminates all oils and germs left behind by users. Though IVP sells these stands all year long, they sell the most during the summer months, when end-of-fiscal year purchases are at a peak. The demand over the next 12 months is shown in the table below. Use the demand forecasts and determine the lowest cost production plan.
Month
Demand Forecast
Month
Demand Forecast
January
133,067
July
251,630
February
155,026
August
249,630
March
168,200
September
200,312
April
173,890
October
160,830
May
202,759
November
145,266
June
260,842
December
128,900
Regular production cost
$35 per unit
Holding cost
$9 per unit per month based on ending inventory
Backorder cost
$14.00 per unit per month based on ending inventory
Beginning Inventory
200,000 units
Beginning workforce
10 employees
Regular production rate
13,750 units per employee per month
Hiring cost
$9,000 per worker
Firing cost
$10,500 per worker
For the next 4 questions follow the chase production strategy. Absorb variations in demand by changing the size of the workforce. When additional employees are hired or fired, they cannot be fractions of a person. You must round up to the next whole person. When you round up, all those employees work the full month which could result in some inventory that is carried to the next period. Ending inventory should be as low as possible each month.
1.How many units are produced for the year using the chase production strategy?
2.What is the annual total cost of firing employees in this example following the chase production strategy?
3.What are the total costs incurred following the chase production strategy?
4.How many workers are required in July following the chase production strategy?
Month
Demand Forecast
Month
Demand Forecast
January
133,067
July
251,630
February
155,026
August
249,630
March
168,200
September
200,312
April
173,890
October
160,830
May
202,759
November
145,266
June
260,842
December
128,900
Explanation / Answer
Ans:
1. Units produced using regular time production: beginning workforce = 10 employees. regular production rate = 13,750 per worker per month. regular production for a month = 13,750*10 = 137,500 units
regular production for a year = 137,500*12 = 1,650,000 units
2. Total demand for the year = 2,230,352 units (this is the sum of demand for all months)
less: beginning inventory = - 200,000
production required in the year = 2,030,352 units
Monthly production should be = 2,030,352/12 = 169,196 units per month.
Units produced by 1 worker = 13,750. so number of workers required = 169,196/13,750 = 12 workers are required throughout the year (and the company will have to hire 12-10 = 2 more workers)
3. Hiring required for the 1st month = 2 workers (as calculated above). hring cost per worker = $9,000
total hiring cost for 1st month = 2*9,000 = $18,000
4. chase strategy means production must match demand.
Notes to the above table :
a. No production is required in January as beginning inventory is more than demand
b. calculation of hired or fired workers: take the month of Feb. demand = 155,026. inventory = 66,933. so productio required = 155026-66933 = 88093. to make them we need 88093/13750 = 6.41 workers. this has been rounded to 7 workers in the table above.
c. production = (beginning workforce-fired+hired)*13750
d. closing inventory = beginning inventory+production-demand
e. the closing inventory has not been allowed to become negative, by adjusting the no. of hired or fired workers
Month Demand Beginning inventory Beginning workforce Hired Fired Production Closing inventory Closing workforce Jan 133,067 200,000 10 0 10 0 66,933 0 Feb 155,026 66,933 0 7 0 96,250 8,157 7 March 168,200 8,157 7 5 0 165,000 4,957 12 April 173,890 4,957 12 1 0 178,750 9,817 13 May 202,759 9,817 13 2 0 206,250 13,308 15 June 260,842 13,308 15 4 0 261,250 13,716 19 July 251,630 13,716 19 0 1 247,500 9,586 18 August 249,630 9,586 18 0 0 247,500 7,456 18 September 200,312 7,456 18 0 3 206,250 13,394 15 October 160,830 13,394 15 0 4 151,250 3,814 11 November 145,266 3,814 11 0 0 151,250 9,798 11 December 128,900 9,798 11 0 2 123,750 4,648 11Related Questions
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