A company is developing an aggregate capacity plan from the sales forecast below:
Quarter 1 2,000
Quarter 2 1,500
Quarter 3 1,600
Quarter 4 1,800
The company currently has 69 employees who produced 1,800 units last quarter. Each product takes 20-labor hours to complete and each employee works 520 hours per quarter. It costs $1,000 to hire a worker and $500 to lay off a worker. Inventory carrying cost is $100 per unit. The hourly rate for employees is $20 per hour for straight time and $30 per hour for overtime. There is no capacity for subcontracting. Shortages are handled by backorders and the shortage cost is $10 per unit.
a. Develop a level capacity plan for the company. Assume overtime is limited to 25% of regular capacity. Beginning inventory is 275 units. Show the quarterly production levels, the number of employees per quarter, and the total costs.
b. Develop a chase capacity plan for the company. Assume overtime is limited to 25% of regular capacity. There is no beginning inventory. Show the quarterly production levels, the number of employees per quarter, and the total costs.
c. Which approach should the company take? How much would the company save?