The S&OP team at Kansas Furniture, has received estimates of demand requirements

Question

The S&OP team at Kansas Furniture, has received estimates of demand requirements as shown in the table. Assuming one-time stockout costs for lost sales of $125 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 $65 per unit premium cost. Subcontracting capacity is limited to 800 units per month. (Enter all responses as whole numbers).

Plan B: Vary the workforce to produce the prior month's demand. The firm produced 1,300 units in June. The cost of hiring additional workers is $30 per unit produced. The cost of layoffs is $65 per unit cut back. (Enter all responses as whole numbers.)

Note: Both hiring and layoff costs are incurred in the month of the change (i.e., going from production of 1,300 in July to 1000 in August requires a layoff (and related costs) of 300 units in August).

ubcontrac A 2 October le December 1 1300 1-1-o-1 The total cost excludino D as a whole number ormal time labo rres se

Explanation / Answer

Plan A

Plan B

Month Demand Production Ending
Inventory Subcontract 0 Jul 1000 1000 0 0 Aug 1200 1000 0 200 Sep 1400 1000 0 400 Oct 1800 1000 0 800 Nov 1800 1000 0 800 Dec 1800 1000 0 800 Total 3000 Cost $195,000

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