Problem:
A company produces to a seasonal demand, with the forecast for the next 12 months as given below.
The present labor force can produce 500 units per month. Each employee added can produce an additional 20 units per month and is paid $1000 per month. The cost of materials is $30 per unit. Overtime can be used at the usual premium of time and a half for labor up to a maximum of 10 percent per month. Inventory-carrying cost is $50 per unit per year. Changes in production level cost $100 per unit due to hiring, line changeover costs, and so forth. Assume 200 units of initial inventory. Extra capacity may be obtained by subcontracting at an additional cost of $15 per unit over and above the company's producing them itself on regular time.
Provide a detailed cost breakdown for using a level vs. a chase strategy to meet the increased demand. Which strategy do you recommend? How much savings would result from the plan you recommend?
The following excerpt is from the email sent to all students in the class, 'After reviewing the assignment, I have decided to allow you to stock-out inventory--reach zero inventory--in the Level strategy for any month except the year end, which still has to be +/- 10% of the 200 inventory.'
Stock-out and Year-end replenishment of inventory to +/- 10% of 200 are two different issues. Stock-out may occur during the year, but beginning-of-year inventory is 200 units and end-of-year inventory must be +/- 10% of 200 units.