The president of Hill Enterprises, Terri Hill, projects the firm\'s aggreg ate d

Question

The president of Hill Enterprises, Terri Hill, projects the firm's aggreg ate demand requirements over the next 8 months as follows January February March April 1,450 1,600 1,800 1,900 May June July August 2,100 2,300 1,800 1,300 Her operations manager is considering a new plan, which begins in January with 200 units of inventory on hand. Stockout cost of lost sales is $65 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. Evaluate the following plans D and E. Plan D: Keep the current workforce stable at producing 1,600 units per month. In addition to the regular production, another 20% of the normal production units can be produced in overtime at an additional cost of $55 per unit. A warehouse now constrains the maximum allowable inventory on hand to 600 units or less Note: Do not produce in overtime if production or inventory are adequate to cover demand

Explanation / Answer

Explanations:

Over time (O.T.) production can be maximum 20% of normal production; 20% of 1600 = 320 units per period (maximum). Therefore O.T. production if required is either (Demand - Previous Inventory + Production) or 320 units.

Ending inventory for a period can be calculated with the help of following formula -

Ending inventory = Ending Inventory for previous period + Regular production + Overtime Production – Demand

Negative ending inventory is stock out units (it is assumed that stock out units can be carry forward for next period)

Plan D Month Demand Production (units) O. T. Production (units) Ending Inventory Stock outs (units) 0 December 200 1 January 1450 1600 0 350 0 2 February 1600 1600 0 350 0 3 March 1800 1600 0 150 0 4 April 1900 1600 150 0 0 5 May 2100 1600 320 0 180 6 June 2300 1600 320 0 560 7 July 1800 1600 320 0 440 8 August 1300 1600 140 0 0

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