Question

Kangaroo P/L has the following demand forecast next year, expressed in six bimonthly (2-month) periods:

Period	Forecast Demand (Standard U nits of Work)
1	400
2	380
3	470
4	530
5	610
6	500

The following costing data have been obtained:

• Each employee works 176 regular working hours per month
• Each unit requires 20 standard hours to produce
• The labour costs are $6 per normal hour and $9 per overtime hour
• It costs $3 per month to hold an item in inventor
• The company has 22 employees at the end of the current year (i.e. at the beginning of period 1 of the following year which is being planned), and wants to end period 6 of the planning year with the same number of employees, i.e. 22 employees. It costs $400 to hire and $500 to lay off an employee. The company begins the planning year with no inventory.

Question 3

The company wants to determine the cost of meeting the demand by using a mixed strategy which involves changes in the number of employees and the use of overtime work. To keep from adding too many temporary employees during the peak demand period, the company will use overtime equal to up to 25 percent of the regular-time hours available.

If at least 50% of a new employee’s regular-time capacity could be utilized during the current period as well as the next period, it will add an employee, otherwise overtime will be used. An example is shown below:

Period 1 20.5 round down to 20 employees as the extra 50% cannot be used in period 2, & extra time is used to cover for the 50%

Period 2- 19.3 round down to 19 plus overtime

Period 3 -21.5 round up to 22 employees as the extra 50% can be used in period 4

Period 4- 23

The company will continue to add employees as required until the maximum employment level as dictated by the constraint of using overtime subject to a maximum of 25 percent of regular-time hours during the peak period, i.e. period 5 (see question 2). Once the maximum employment level is reached, overtime will be used and no more employees are added.

a) Find the employment level for each bimonthly period.

b) Find the total payroll-related costs for the year.

c) What cost per unit results from these payroll-related costs? (Ans. $126 per unit)

Answer 1