A local company makes athletic clothing and they are preparing aggregate product

Question

A local company makes athletic clothing and they are preparing aggregate production plans on a quarterly basis for the coming year for their line of women's wear. They have the following information available to develop a level capacity and a matching (chase) demand plan: (Assume that pattern of demand repeats each year, that is the demand in quarter 4 of the previous year was 13,000 units) Number of working days per quarter = 65 days Number of hours per day per person = 8 hours Labor to produce one unit = 5 hours Demand for four quarters respectively: 12,300, 12,500, 12,200, 13,000 units Cost of hiring a worker = $800 Cost of laying off a worker = $500 Inventory carrying cost per unit per year = $60

What is the total inventory carrying (holding) cost under the level strategy?

a. $13,500

b. $54,000

c. $4,500

d. $0

e. $27,000

Explanation / Answer

Average quarterly demand = (12300+12500+12200+13000)/4 = 12500

Under the level strategy, there will be a production of 12,500 units every quarter.

Inventory at the end of quarter 1 = Begining inventory + Production - Demand = 0 + 12500-12300 = 200

Inventory at the end of quarter 2 = Begining inventory + Production - Demand = 200 + 12500-12500 = 200

Inventory at the end of quarter 3 = Begining inventory + Production - Demand = 200 + 12500-12200 = 500

Inventory at the end of quarter 4 = Begining inventory + Production - Demand = 500 + 12500-13000 = 0

Total inventory = 200+200+500+0 = 900

Inventory carrying cost = 900*60 = $ 54,000

ANSWER: b. $ 54,000

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