Describe the differences between level, chase, and mixed production plans. Use the forecast in the table to show the differences by creating a plan of each type

Question

There is no beginning inventory and regular production capacity is 350 units. Overtime costs $10 extra and is limited to 50 units per month. Subcontracting is limited to 100 units per month and costs $15 per unit. Back orders cost $40 per unit and there is a cost of $5 per month to hold a unit in inventory. There is room for only 100 units in inventory.

Month Forecast
January 250
February 300
March 500
April 350

What will be an ideal response?

Answer 1

Answer: Production is held constant in a level production plan while inventory is used to absorb differences between production and the sales forecast. In a chase production plan, production is changed each time period to match the sales forecast. A mixed production plan varies both production and inventory levels in an effort to develop the most cost effective plan.
Production plans will vary.
Total forecasted demand for the planning period is 250 + 300 + 500 + 350 = 1400
This neatly divides by 4 as 350 units per month, exactly equal to capacity. Unfortunately this exceeds the limit on ending inventory.

Level Plan
Month Forecast Regular Overtime Subcontracting Ending Inventory
January 250 325 75
February 300 325 100
March 500 325 -75
April 350 325 -100

The chase plan has a regular capacity opportunity in March, but this can be covered by overtime and subcontracting that are both at their limit.

Chase Plan
Month Forecast Regular Overtime Subcontracting Ending Inventory
January 250 250 0
February 300 300 0
March 500 350 50 100 0
April 350 350 0

The mixed plan has almost infinite possiblities.

Mixed Plan
Month Forecast Regular Overtime Subcontracting Ending Inventory
January 250 300 50
February 300 300 50
March 500 350 50 50 0
April 350 350 0