For this problem you must develop an aggregate plan based on the aggregate forec

Question

For this problem you must develop an aggregate plan based on the aggregate forecasted demand shown

in the table below.

Month Forecasted demand

November 26

December 12

January 18

February 24

You will also need the following data:

Average number of units a worker can produce in one month 2

Initial inventory on hand 10

Initial number of workers 6

Desired inventory at the end of the planning period 12

Cost of hiring one worker $5

Cost of ring one worker $10

Cost of holding one unit of inventory for one month $1

(a) Recommend an aggregate plan (# hired and # red in each period) that results in zero inventory

held in each period. Compute the following costs for this plan: hiring/ring cost for each period,

inventory cost for each period, total cost.

Recommend an aggregate plan (# hired and # red in each period) that has a constant workforce

(level strategy; same number of workers in each period) and meets the total demand. Compute the

following costs for this plan: hiring/ring cost for each period, inventory cost for each period, total

cost.

Recommend an aggregate plan (# hired and # red in each period) that has a lower total cost than

your answers for part a and part b in the previous problem. Compute the following costs for this plan:

hiring/ring cost for each period, inventory cost for each period, total cost.

Consider the numbers from the previous problem. Now subcontracting (outsourcing) is allowed in your

aggregate plan. What would the cost of subcontracting have to be in order for you to

recommend revising your aggregate plan in part (a) to include subcontracting? Give your

revised aggregate plan (# hired/red in each period and # subcontracted in each period)

and compute the following costs for your revised plan: hiring/ring cost for each period,

inventory cost for each period, subcontract cost for each period, and total cost.

Explanation / Answer

Asset transformation by an FI involves purchasing primary assets and issuing secondary assets as a source of funds. The primary securities purchased by the FI often have maturity and liquidity characteristics that are different from the secondary securities issued by the FI. For example, a bank buys medium- to long-term bonds and makes medium-term loans with funds raised by issuing short-term deposits.

Interest rate risk occurs because the prices and reinvestment income characteristics of long-term assets react differently to changes in market interest rates than the prices and interest expense characteristics of short-term deposits. Interest rate risk is the effect on prices (value) and interim cash flows (interest coupon payment) caused by changes in the level of interest rates during the life of the financial asset.

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