The president of Hill Enterprises, Terri Hill, projects the firm\'s aggregate de
ID: 464816 • Letter: T
Question
The president of Hill Enterprises, Terri Hill, projects the firm's aggregate demand requirements over the next 8 months as follows:
January
1,400
May
2,100
February
1,600
June
2,100
March
1,800
July
1,800
April
1,900
August
1,500
Her operations manager is considering a new plan, which begins in January with 200 units on hand and ends with zero inventory. Stockout cost of lost sales is $125 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. The plan is called plan B.
Plan B: Produce at a constant rate of 1,400 units per month, which will meet minimum demands. Then use subcontracting, with additional units at a premium price of $75 per unit. Subcontracting capacity is limited to 700 units per month. Evaluate this plan by computing the costs for January through August.
A) In order to arrive at the costs, first compute the ending inventory and subcontracting units for each month by filling in the table below (enter your responses as whole numbers).
Period----
Month
Demand-----
Production-------
Ending Inventory--------
Subcontract Units
0
December
?
1
January
1400
1400
?
?
2
February
1600
1400
?
?
3
March
1800
1400
?
?
4
April
1900
1400
?
?
5
May
2100
1400
?
?
6
June
2100
1400
?
?
7
July
1800
1400
?
?
8
August
1500
1400
?
?
B) The total subcontracting costequals= ? (Enter your response as a whole number.)
C) The total inventory carrying cost = ? (Enter your response as a whole number.)
The total cost, excluding normal time labor costs, is = ? (Enter your response as a whole number.
January
1,400
May
2,100
February
1,600
June
2,100
March
1,800
July
1,800
April
1,900
August
1,500
Explanation / Answer
Beginning inventory for January month = 200 units
Inventory holding cost = $20 per unit per month
Subcontracting Cost = $75 per unit
Subcontracting Limit = 700 units per month
Constant production rate = 1400 per month
A)
Plan B
Period
Month
Demand
Production
Ending Inventory
Subcontract Units
0
December
200
0
1
January
1400
1400
200
0
2
February
1600
1400
0
0
3
March
1800
1400
-400
400
4
April
1900
1400
-500
500
5
May
2100
1400
-700
700
6
June
2100
1400
-700
700
7
July
1800
1400
-400
400
8
August
1500
1400
-100
100
Note:
Jan: Ending inv = Beg. Inv + Production – Demand = 200 + 1400 – 1400 = 200 units
Feb: End. Inv. = 200 + 1400 – 1600 = 0
Mar: End. Inv. = 0 + 1400 – 1800 = -400, this means demand is not meet, thus shortage is meet by subcontracting that much units.
Calculating costs:
B)
Total units Subcontracted = 400 +500 +700 + 700 + 400 + 100 = 2800 units
Total Subcontracting cost = units subcontracted x Subcontracting price per unit
Total Subcontracting cost = 2800 x $75 = $210,000
C)
Total Ending inventory = 200
Total Inventory holding cost = total ending inventory x holding cost
Total Inventory holding cost = 200 x 20 = $4,000
D)
Total cost, excluding normal time labor costs, is = Total inventory cost + Total Subcontracting Cost
Total cost = $4,000 + $210,000 = $214,000
Plan B
Period
Month
Demand
Production
Ending Inventory
Subcontract Units
0
December
200
0
1
January
1400
1400
200
0
2
February
1600
1400
0
0
3
March
1800
1400
-400
400
4
April
1900
1400
-500
500
5
May
2100
1400
-700
700
6
June
2100
1400
-700
700
7
July
1800
1400
-400
400
8
August
1500
1400
-100
100
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