For the scenario provided, calculate the two costs of two different strategies: a. level annual production with inventory and stockout b. matching or chasing demand
Scenario: The Sherman-Brown Chemical Company is in the process of developing an aggregate capacity plan for next year. Two alternative plans are being considered, level capacity with inventory and matching demand. For each of the plans, determine the incremental cost of the plan compared to the alternate plan (the level capacity versus the matching demand). Assume that there are 234 workers currently employed at the beginning of Quarter 1, and that the beginning inventory is zero. In addition, assume that it takes 2.311 production hours to produce one gallon of paint. During a quarter, each worker works 65 days and 8 hours per day. The cost to hire a worker is $250 and the cost to layoff a worker is $300. Also, the carrying cost for a gallon of paint is $5 per year. The cost of a stockout is $25 per gallon. The labor rate is $20 per hour. Demand is as follows: Quarter 1: 40,000 gallons Quarter 2: 55,000 gallons Quarter 3: 52,500 gallons Quarter 4: 57,000 gallons