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:

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

Ending Inventory

Explanation:

Regular Production under Level Production Plan = Total Demand / Total Quarters = 50,000 units / 4 quarters = 12,500 units

Ending Inventory = Begining Inventory + Regular Production - Demand

Assuming that the Begining Inventory is Zero Average Inventory for a year = Total Inventory / No. of quarters = 900 units / 4 quarters = 225 units

Total Inventory Carrying (Holding Cost) = Average Inventory for a year * Invetory holding cost per unit = 250 units * $ 60 per unit = $ 13,500

Hence, Total Inventory Carrying (Holding Cost) under the level strategy is $ 13,500

Period Demand (units) Regular Production Begining Inventory

Ending Inventory

First Quarter 12,300 12,500 0 200 Second Quarter 12,500 12,500 200 200 Third Quarter 12,200 12,500 200 500 Fourth Quarter 13,000 12,500 500 0 Total 50,000 50,000 900 900

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