Mary Rhodes, operations manager at Kansas Furniture, has received the following estimates of demand requirements:
- a) Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per 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 subcontract additional units at a $60 per unit premium cost.
- Plan B: Vary the workforce, which performs at a current production level of 1,300 units per month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.
|Month||Demand||Production||End of period Inventory||Sub Contract Units||Inventory Cost||Subcontract Cost|
|Total Cost||$ 168000|
|Month||Demand||Production||Hire||Layoff||Hire Cost||Layoff Cost|
Total Cost in Plan B = 30000+24000 = $ 54000
- b) Which plan is best and why?
Comparing both the plan, we find that Plan B is better.