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EXERCISE 8 CHAPTER 12 Aggregate

Osprey Fabrication has aggregate demand requirements for four quarters, including demand levels, previous output, hiring/layoff costs, inventory holding costs, and unit production costs. Two production plans are considered: Plan A follows a "chase demand" strategy of hiring and layoffs to meet quarterly demand, while Plan B maintains a fixed production level of 1300 units with overtime to meet excess demand. The total costs are calculated for each plan. Plan A results in total costs of $239,000 while Plan B costs $170,500. Therefore, Plan B which maintains a fixed production level with overtime is the better production plan as it saves $68,500 in costs compared to Plan A.

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86 views2 pages

EXERCISE 8 CHAPTER 12 Aggregate

Osprey Fabrication has aggregate demand requirements for four quarters, including demand levels, previous output, hiring/layoff costs, inventory holding costs, and unit production costs. Two production plans are considered: Plan A follows a "chase demand" strategy of hiring and layoffs to meet quarterly demand, while Plan B maintains a fixed production level of 1300 units with overtime to meet excess demand. The total costs are calculated for each plan. Plan A results in total costs of $239,000 while Plan B costs $170,500. Therefore, Plan B which maintains a fixed production level with overtime is the better production plan as it saves $68,500 in costs compared to Plan A.

Uploaded by

Nor Saadiah Mat Dali
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Osprey Fabrication has the following aggregate demand requirements and other data for the

upcoming four quarters.

Quarter Previous quarter's output


Demand 1350 units
1 1500Beginning inventory 0 units
2 1300Stockout cost $50 per unit
3 1700Inventory holding cost $10 per unit at end of quarter
4 1400Hiring 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?


(i) Plan A-chase demand by hiring and layoffs?
Chase demand strategy
Previous quarter's output = 1350 units
Quarter Demand Production Hire Layoff
1 1500 1500 150 0
2 1300 1300 0 200
3 1700 1700 400 0
4 1400 1400 0 300
Total 5900 550 500

Calculation by parts:-
- Production = Demand
- Hire Quarter 1 = Production Quarter 1 - Previous quarter's output = 1500 – 1350 = 150
- Layoff Quarter 2 = Production Quarter 1 - Production Quarter 2 = 1500 – 1300 = 200
- Hire Quarter 3 = Production Quarter 3 - Production Quarter 2 = 1700 – 1300 = 400
- Layoff Quarter 4 = Production Quarter 3 - Production Quarter 4 = 1700 – 1400 = 300
- Total production = 1500 + 1300 + 1700 + 1400 = 5900
- Total Hire = 150 + 400 = 550
- Total Layoff = 200 + 300 = 500
- Total cost production = Total production X Unit Cost = 5900 X 30 = 177000
- Total cost hire = Total hire X Hiring workers = 550 X 40 = 22000
- Total cost layoff = Total layoff X Laying off workers = 500 X 80 = 40000
- Total cost = TC production + TC hire + TC layoff = 177000 + 22000 + 40000 = 239000
(ii) Plan B-1300 level with the remainder by overtime?
Level demand strategy
Previous quarter's output = 1350 units
Quarter Demand Production Inventory Layoff Overtime
1 1500 1300 0 50 200
2 1300 1300 0 0 0
3 1700 1300 0 0 400
4 1400 1300 0 0 100
Total 5200 0 50 700

Calculation by parts:-
- Production = Plan B (1300)
- Layoff Quarter 1 = Previous quarter's output - Production Quarter 1 = 1350 – 1300 = 50
- Overtime Quarter 1 = Demand Quarter 1 - Production Quarter 1 = 1500 – 1300 = 200
- Overtime Quarter 3 = Demand Quarter 3 - Production Quarter 3 = 1700 – 1300 = 400
- Overtime Quarter 4 = Demand Quarter 4 - Production Quarter 4 = 1400 – 1300 = 100
- Total production = 1300 + 1300 + 1300 + 1300 = 5200
- Total Inventory = 0
- Total Layoff = 50
- Total Overtime = 200 + 400 + 100 = 700
- Total cost production = Total production X Unit Cost = 5200 X 30 = 156000
- Total cost inventory = Total inventory X Inventory holding cost = 0 X 10 = 0
- Total cost layoff = Total layoff X Laying off workers = 50 X 80 = 4000
- Total cost overtime = Total overtime X Overtime = 700 X 15 = 10500
- Total cost = TC production + TC inventory + TC layoff + TC overtime
- Total cost = 156000 + 0 + 4000 + 10500 = 170500

Save cost = TC level demand strategy – TC chase demand strategy


Save cost = 239000 – 170500 = 68500
Therefore, Chase demand strategy is better production plans.

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