The forecast for monthly demand is given below. On average there are 22 producti

Question

The forecast for monthly demand is given below. On average there are 22 production days in a month. It takes one worker three days to complete one unit. The current production work force level is 50 employees. The cost of hiring an employee is $500, and the cost of firing an employee is $450. Regular time pay per employee is $1,250 per month. The cost to hold an ending inventory for a month is $4 per unit. The current level of inventory is 800 units. As protection against unforeseeable demand fluctuations, the ending inventory for each month is planned at no less than but as close as to 800 units. Develop separate production plans for chase and level strategies. What is the cost over 12 periods for each plan? Which plan is better? Planning Period 1 2 3 4 5 6 7 8 9 10 11 12 Monthly Demand 372 414 395 381 418 359 386 398 409 417 421 425

Explanation / Answer

1) During October, MacPeters CAD provided $1,900 of CAD services to clients who will be billed in early November. The firm uses the account Fees Receivable to reflect amounts due but not yet billed.

2) The firm paid $2,400 cash on October 15 for a series of radio commercials to run during October and November. One-third of the commercials have aired by October 31st. The $2,400 payment was recorded in the Prepaid advertising account.

3) Starting October 1, all maintenance work on MacPeters CAD’s computer and printing equipment is handled by PC Guru under an agreement whereby MacPeters CAD pays a fixed monthly charge of $800. MacPeters CAD paid six months’ service charge of $4,800 cash in advance on October 1, and increased its Prepaid expenses account by $4,800.

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