13.9 Jul. Aug. Sept Oct. Nov Dec. 1000 1200 1400 1800 1800 1600 Assuming stackau

Question

13.9 Jul. Aug. Sept Oct. Nov Dec. 1000 1200 1400 1800 1800 1600 Assuming stackaut 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: o 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, to produce the prior month's demand. The firm produced 1.300 units in June. 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. 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 1,000 in August requires a layoff (and related costs) of 300 units in August, just as going from production of 1,000 in August to 1.200 in September requires hiring (and related costs) of 200 units in September) b) Which plan is best and why? .

Explanation / Answer

Plan A is better than Plan B. Sub -Contracting involves only $60 per additional unit. So for 300 additional units we will need only $1800.

But Plan B involves both hiring cost and cost of layoff per 100 units. So for every 100 unit extra in plan B we will have (3000 + 6000) = $9000 extra cost.

So for 300 additional units we will incur $ 27,000 extra cost, i.e. almost 93% extra cost. Clearly B is NOT a cost-effective solution.

Hence, we should opt for Plan A.

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