The Good and Rich Candy Company makes a variety of candies in three factories wo

Question

The Good and Rich Candy Company makes a variety of candies in three factories worldwide. Its line of chocolate candies exhibits a highly seasonal demand pattern, with peaks during the winter months (for the holiday season and Valentine’s Day) and valleys during the summer months (when chocolate tends to melt and customers are watching their weight). Given the following costs and quarterly sales forecasts, determine whether (a) level production, or (b) chase demand would more economically meet the demand for chocolate candies:   

Sales Forecast

Fall

Hiring cost = $100 per worker

Firing cost = $ 500 per worker

Inventory carrying cost = $0.5 per pound per quarter

Regular production cost per pound = $2.00

Production per employee = 1000 pounds per quarter

Beginning workforce = 100 workers

Quarter

Sales Forecast

Spring 80,000 Summer 50,000

Fall

120,000 Winter 150,000

Explanation / Answer

a)Level Production Strategy: This strategy involves averageing out the production.

Average Production in all four quarters: (80000 + 50000 + 120000 + 150000)/4

=100000 units.

Since each worker can produce 1000 pounds per quarter hence to produce 1,00,000 pounds we will require

: 1,00,000/1000   = 100 workers

Since we already have 100 workers hence no hiring and firing costs would be incurred.

Let us compute production and inventory costs:

Hence total costs incurred is production of 400,000 pounds at the rate of $2 and holding inventory of 140,000 @0.5

= 400,000 * $2 + 140,000 * $0.5

=$870,000

2)Chase demand Strategy:

Here any additional workers apart from what is required to fulffill the demand are fired and if there is a shortfall then hiring is done.

Hence total cost in this strategy is :

400,000 * $2 + 100 * $100 + 50 *$500

= $835000

Since the second strategy yeilds less cost hence it shall be adopted.

Notes:

a)Inventory Computation in Level Production Strategy:

Spring : Production - Forecast   = 100000- 80000 = 20000

Summer : 100000-50000 = 50000; Total inventory = opening inventory + current

               :20000 + 50000 = 70000

Fall : Since here production is less than demand hence opening stock is utilised.

100000 - 120000 = (20000)

Closing stock = 70000 - 20000 = 50000

Winter : 100000 - 150000= (50000)

Closing stock = 50000 - 50000 = 0

2) Chase demand Strategy.

Workers required column is computed by : Production / 1000 ( since each worker produces 1000 pound)

Workers Fired Column : It is computed by comparing workers required column and existing workers. Excess are fired.

Spring : 100 - 80 = 20.

Closing number of workers = 80

Summer : 80 -50 = 30

Closing number of worker : 50

Workers Hired :

Fall : 120 - 50 = 70

Closing number of workers : 120

Winter : 150 -120 : 30

Quarter Production Forecast Inventory Spring 100,000 80,000 20,000 Summer 100,000 50,000 70000 Fall 100,000 120,000 50000 Winter 100,000 150,000 0 Total 400,000 140,000

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