Fred's Fabrication has the following aggregate demand requirements and other data for the upcoming four quarters

Question

Quarter Demand Previous quarter's output 800 units
1 700 Beginning inventory 0 units
2 900 Stockout cost $100 per unit
3 1200 Inventory holding cost $10 per unit at end of quarter
4 600 Hiring workers $20 per unit
Laying off workers $40 per unit
Subcontracting cost $200 per unit
Unit cost $100 per unit

Which of the following production plans is better: Plan A–chase demand by hiring and layoffs; Plan B–pure level strategy, or Plan C–700 level with the remainder by subcontracting?

Answer 1

Plan A has cost of $378,000, plan B has cost of $368,500, and plan C has cost of $425,000. Plan B has the lowest cost. Note that Plan C has an ending inventory of 100 units, which is the result of level production that exceeds demand in the last quarter.

Plan A — Chase strategy
Fred's Fabrication Solution
Demand Regular Time Capacity Regular Time Production Units Increase Units Decrease
Initial Inventory
Period 1 700. 1,200. 700. 0. 100.
Period 2 900. 1,200. 900. 200. 0.
Period 3 1,200. 1,200. 1,200. 300. 0.
Period 4 600. 1,200. 600. 0. 600.
Total (units) 3,400. 4,800. 3,400. 500. 700.
@$100/unit @$20/unit @$40/unit
Subtotal Costs 340,000. 10,000. 28,000.
Total Cost 378,000.

Plan B — Level production, 850 per quarter
Fred's Fabrication Solution
Demand Regular Time Capacity Regular Time Production Inventory (end PD) Shortage (end PD) Units Increase
Initial Inventory 0.
Period 1 700. 1,200. 850. 150. 0. 50.
Period 2 900. 1,200. 850. 100. 0. 0.
Period 3 1,200. 1,200. 850. 0. 250. 0.
Period 4 600. 1,200. 850. 0. 0. 0.
Total (units) 3,400. 4,800. 3,400. 250. 250. 50.
@$100/unit @$10/unit @$100/unit @$20/unit
Subtotal Costs 340,000. 2,500. 25,000. 1,000.
Total Cost 368,500.

Plan C — 700 units level, with subcontracting

Demand Regular Time Production Subcon-
tracting Production Regular Time Production Subcon-
tracting Inventory (end PD) Units Decrease
Initial Inventory 0.
Period 1 700. 700. 0. 700. 0. 0. 100.
Period 2 900. 700. 200. 700. 200. 0. 0.
Period 3 1,200. 700. 500. 700. 500. 0. 0.
Period 4 600. 700. 0. 700. 0. 100. 0.
Total (units) 3,400. 2,800. 700. 2,800. 700. 100. 100.
@$100/unit @$200/unit @$10/unit @$40/unit
Subtotal Costs 280,000. 140,000. 1,000. 4,000.
Total Cost 425,000.