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

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 $20 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 1,200 units per month and subcontract additional units at a $70 per unit premium cost. Subcontracting capacity is limited to 500 units per month. (Enter all responses as whole numbers) Ending Subcontract 1 July 2 August 3 September1200 4 October 5 November 6 December Month Demand Production Inventory(Units) 1,200 1,200 1,200 1,200 1,200 1,200 1200 1300 1700 1650 1650 0 The total cost, excluding normal time labor costs, for Plan A S (Enter your response as a whole number) 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 $35 per unit produced. The cost of layoffs is $65 per unit cut back. (Enter all responses as whole numbers.)

Explanation / Answer

Plan A

Total Cost = 1500 x $70 = $105,000

Plan B

Note: Nothing has been mentioned regarding the carrying cost assumption i.e. whether to be levied on average inventory on ending inventory. So, we are showing up both the calculations.

a) Carrying cost based on ending inventory

(b) Carrying cost based on average inventory

Month Demand Prod End Inv Subcontract 1 Jul 1200 1200 0 0 2 Aug 1300 1200 0 100 3 Sep 1200 1200 0 0 4 Oct 1700 1200 0 500 5 Nov 1650 1200 0 450 6 Dec 1650 1200 0 450 Total 1500

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