Question

CGA 9 (Aggregate Planning) The S&OP team at Kansas Furniture has received the following estimates of demand requirements Aug 1,200 Sept 400 1,800 Jul Oct Nov Dec ,800 1,800 a) Assuming one-time stockout costs for lost sales of $100 per uni, nventory carrying costs of $25 per unit er month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and Plan B: Vary the workforce, to produce the prior month's demand. The firm produced 1,300 units in subcontract additional units at a $60 per unit premium cost. June. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back Note: Both hiring and layoff costs are incurred in the month of the change, (i.e. going from production of 1,300 in July to 1,000 in August requires a layoff (and related costs) of 300 units in August, just as going from production of 1,000 in August to 1,200 in September requires hiring (and related costs) of 200 units in b) Which plan is best and why?

Answer 1

Note

• There is no lost sales in both plans.
• we assume that there is no limit on the number of units that can be subcontracted

Plan A - Constant production rate
here production on al months is at a constant rate of 1000 units per month

lay off 6000 for 100 units
so, lay off cost for 1 unit =6000/100
similarly, hiring cost for 1 unit =3000/100

Plan B - varying workforce

Here we vary the workforce to meet the demand

Pian A Constant production rate 1400 1300 10 MAX GS-G8) -MAXHS-HB) MAX IS-13) 12 -D14 -E14 -F14 -G14 -H14 13 hiringlin terms of units) 15 16 17 18 19 20 21 -MAXIG8-F8,0) MAX H8-G8,0) ay off Production cost subcontrcat cost Inventory cost -60 D10 -60°E 10 -60 F10 -60.610 -60 H10 -60.1 10 "25"AVERAGE(D12"25"AVERAGE(E12:"25"AVERAGEF12:F13) ·25"AVERAGE(G12: "25"AVERAGEiH12:H13:"25"AVERAGEI 12:113) 23 24. 25 26 27 28 lay off -SUM D20:D24) SUM E20:E24) SUMIF20 F24 SUM G20:G24)SUMIH20:H24) SUMI20:124) Total =SUM(D25125)

Plan A varying workforce 1400 1900 1900 1300 10 12 13 14 15 16 17 18 19 20 21 -P14 -R14 -514 hiring in terms of units) lay off Production cost -100 08 60 R10 Inventory cost =25*AVERAGEO12 =25*AVERAGEP12 =25*AVERAGEIQ12:Q13) :25*AVERAGE[R12:12 5*AVERAGE[S12S13) =25*AVERAGE[T12:T131 -13000/100,-015-3000/1001-P1S-(3000/100ras =16000/100-016-6000/100)"P16-6000/100/"Q16 SUMIO20:024) UMIP20:P24) SUMI020:024) -(3000/1001-TIS =16000/100 16 SUMIT20 T24) 24 25 26 27 lay off -(6000/10ol R16 (600o/10oys16 -SUMIR20R24 SUMIS20:S24) Total SUMIO2S:T25)

M29 Pian A Plan A Constant production rate varying workforce une July August 1400 Production te 1300 1000 1000 1000 1000 1000 1000 Production rete 1300 1000 1200 1400 1800 1800 1800 10 200 400 800 800 800 ending hiringlin terms of units) hiringlin terms of units) 200 200 400 16 lay off 300 ay off 300 17 Production cost subcontrcat cost Inventory cost 100000 100000 100000 100000 100000 100000 Production cost subcontrcat cost Inventory cost 00000 120000 140000 180000 180000 180000 21 0 12000 24000 48000 48000 48000 23 6000 6000 12000 24 lay off ay oft 8000 0 118000 112000 124000 14B000 148000 148000 118000 126000 146000 192000 180000 180000 Totsl 798000 Total 942000

b. plan A with lower cost is the best