Osprey Fabrication has the following aggregate demand requirements and other data for the upcoming four quarters

Question

Quarter Demand Previous quarter's output 1300 units
1 1400 Beginning inventory 0 units
2 1200 Stockout cost $50 per unit
3 1600 Inventory holding cost $10 per unit at end of quarter
4 1500 Hiring workers $40 per unit
Laying off workers $80 per unit
Subcontracting cost $60 per unit
Unit cost $30 per unit
Overtime $15 extra 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 — 1350 level with the remainder by subcontracting?

Answer 1

Plan A will cost $215,000, Plan B will cost $179,500, and Plan C will cost $183,500. Plan B is the cheapest, by a small margin.

Plan A
Osprey Fabrication Solution
Demand Regular Time Capacity Regular Time Production Units Increase Units Decrease
Initial Inventory
Period 1 1,400. 1,400. 1,400. 100. 0.
Period 2 1,200. 1,200. 1,200. 0. 200.
Period 3 1,600. 1,600. 1,600. 400. 0.
Period 4 1,500. 1,500. 1,500. 0. 100.
Total (units) 5,700. 5,700. 5,700. 500. 300.
@$30/unit @$40/unit @$80/unit
Subtotal Costs 171,000. 20,000. 24,000.
Total Cost 215,000.

Plan B
Osprey Fabrication Solution
Demand Regular Time Capacity Regular Time Production Inventory (end PD) Units Increase
Initial Inventory 0.
Period 1 1,400. 1,425. 1,425. 25. 125.
Period 2 1,200. 1,425. 1,425. 250. 0.
Period 3 1,600. 1,425. 1,425. 75. 0.
Period 4 1,500. 1,425. 1,425. 0. 0.
Total (units) 5,700. 5,700. 5,700. 350. 125.
@$30/unit @$10/unit @$40/unit
Subtotal Costs 171,000. 3,500. 5,000.
Total Cost 179,500.

Plan C
Osprey Fabrication Solution
Demand Regular Time Capacity Subcontract Capacity Regular Time Production Subcon-
tracting Inventory (end PD) Units Increase
Initial Inventory 0.
Period 1 1,400. 1,350. 300. 1,350. 50. 0. 50.
Period 2 1,200. 1,350. 300. 1,350. 0. 150. 0.
Period 3 1,600. 1,350. 300. 1,350. 100. 0. 0.
Period 4 1,500. 1,350. 300. 1,350. 150. 0. 0.
Total (units) 5,700. 5,400. 1,200. 5,400. 300. 150. 50.
@$30/unit @$60/unit @$10/unit @$40/unit
Subtotal Costs 162,000. 18,000. 1,500. 2,000.
Total Cost 183,500.