Question

The president of Hill Enterprises, Terri Hill, projects the firm's aggregate demand requirements over the next 8 months as follows: January 1,200 May 2,100 February 1,500 June 2,300 March 1,600 July 1,700 April 1,900 August 1,300 Her operations manager is considering a new plan, which begins in January with 200 units of inventory on hand. Stockout cost of lost sales is $125 per unit. Inventory holding cost is $25 per unit per month. Ignore any idle-time costs. The plan is called plan C.

Plan C: Keep a stable workforce by maintaining a constant production rate equal to the average gross requirements excluding initial inventory and allow varying inventory levels. Conduct your analysis for January through August.

The average monthly demand requirement = ____ units

Fill in the table below. (ending inventory & stockout units)

The total stockout cost = ____

The total inventory carrying cost = ____

Answer 1

Following points may be noted :

1. Ending inventory = Production + Beginning inventory – Demand ( If resultant value is POSITIVE )
2. Stockout ( i.e. unfulfilled demand) = Demand – Production – Beginning Inventory ( If the resultant value is POSITIVE )
3. Beginning inventory of one period = Ending inventory of previous period
4. Stockout cost for a period = $125/ unit x Stockout units
5. Inventory carrying cost = $25/ unit x Ending Inventory

Beginning inventory
Ending Inventory
Stockout cost ( $125 / unit )
Inventory carrying cost ( $25/ unit)

Accordingly :

Total stockout cost = $ 25000

Total inventory carrying cost ( $)

= 17500 + 22500 + 25000 + 20000 + 10000 + 0 + 0 + 10000

= $105,000