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Project Management : Matching or Chasing Demand, Outsourcing and Costs

The Austin, Texas plant of Computer Products produces floppy disk units for personal and small business computers. Gerald Knox, the plant's production planning director, is looking over next year's sales forecasts for these products and will be developing an aggregate capacity plan for the plant. The quarterly sales forecasts for the floppy disk units are as follows:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2,340 2,700 2,610 2,520

Ample machine capacity exists to produce the forecast. Each floppy disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:

a. Inventory carrying cost is $100 per floppy disk unit per quarter.
b. The plant works the same number of days in each quarter, 12 five-day weeks, 6 hours per day.
c. Beginning inventory is zero floppy disk units.
d. In a backlog situation, the customer will wait for his order to be filled but will expect a price reduction each quarter he waits. The backlog costs are $300 per floppy disk for the first quarter the customer waits, $700 for the second quarter the customer waits, and $900 for the third quarter the customer waits. In any quarter, if there is a backlog, this backlog will be filled before the demand for that period is filled.
e. The cost of hiring a worker is $800 while the cost of layoffing a worker is $950.
f. The straight time labor rate is $20 per hour for the first quarter and increases to $22 per hour in the fourth quarter.
g. Overtime work is paid at time and a half (150%) of the straight time work.
h. Outsourcing (contract work) is paid at the rate of $475 per disk unit for the labor and you provide the material
i. Demand is projected to increase this year. Demand during the fourth quarter of the prior year was 2,340 units. The demand for the first quarter of the next year (year following the year you are analyzing) is projected to be at the 2,700 unit level.

a) Computer Products is considering the "matching" or "chasing" demand aggregate planning model for meeting the disk production. Ignoring the material cost, what is the total cost to produce the disks for the year?

b) You want to maintain a work force capable of producing 2,250 in a quarter and outsourcing any disk units over this quantity. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs

c) The company will maintain a work force capable of producing 2,340 units in a quarter. It will allow backlogs to occur until the fourth quarter when it will outsource all demand that cannot be met with its own workforce. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs.

Solution Summary

Matching or Chasing Demand, Outsourcing and Costs are investigated. The solution is detailed and well presented.

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