15) Osprey Machine Works has the following demand requirements and other data fo
ID: 375221 • Letter: 1
Question
15) Osprey Machine Works has the following demand requirements and other data for the upcoming four quarters.
Quarter
Demand
Previous quarter's output
2500 units
1
2300
Beginning inventory
200 units
2
2400
Stockout (backorder) cost
$50 per unit
3
2600
Inventory holding cost
$10 per unit at end of quarter
4
2100
Hiring workers
$4 per unit
Laying off workers
$8 per unit
Unit cost
$30 per unit
Overtime
$10 extra per unit
The firm is pursuing a pure level aggregate plan over the coming year. How much are the layoffs cost associated with this plan?
$0
$1,200
$1,600
$2,000
None of the above
Quarter
Demand
Previous quarter's output
2500 units
1
2300
Beginning inventory
200 units
2
2400
Stockout (backorder) cost
$50 per unit
3
2600
Inventory holding cost
$10 per unit at end of quarter
4
2100
Hiring workers
$4 per unit
Laying off workers
$8 per unit
Unit cost
$30 per unit
Overtime
$10 extra per unit
Explanation / Answer
If the firm is pursuing a pure level aggregate plan over the coming year then it will produce equal quantity in each quarter in such a manner so that it can end-up with zero inventory at the end of period.
Total demand for the period = sum of demand of all quarters
= 2300 + 2400 +2600 +2100
= 9400 units
Beginning inventory is 200 units
Therefore required production for the year = Total demand for the period - Beginning inventory
= 9400 – 200 = 9200 units
And required production for each quarter = 9200 units/4 = 2300 units
But previous quarter's output was 2500 units
Therefore reduction is output (production) in the quarter I of upcoming year = 2500 units -2300 units = 200 units
Layoff cost is $8 per unit
Therefore layoffs cost for 200 units = 200 units * $8 = $1,600
The layoffs cost associated with this plan is $1,600
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