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# Level versus chase strategy: Aggregate production plan

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A company produces to a seasonal demand, with the forecast for the next 12 months as given below.

Month Demand
January 600
February 700
March 800
April 700
May 600
June 500
July 600
August 700
September 800
October 900
November 700
December 600

The present labor force can produce 500 units per month. Each employee added can produce an additional 20 units per month and is paid \$1000 per month. The cost of materials is \$30 per unit. Overtime can be used at the usual premium of time and a half for labor up to a maximum of 10 percent per month. Inventory-carrying cost is \$50 per unit per year. Changes in production level cost \$100 per unit due to hiring, line changeover costs, and so forth. Assume 200 units of initial inventory. Extra capacity may be obtained by subcontracting at an additional cost of \$15 per unit over and above the company's producing them itself on regular time.

Provide a detailed cost breakdown for using a level vs. a chase strategy to meet the increased demand. Which strategy do you recommend? How much savings would result from the plan you recommend?

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See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

Capacity of present labor force 500 units per month
Additional labor 20 units per month
Cost of additional labor 1000 \$ per month
Cost of material 30 \$ per unit
Overtime rate 150% labor rate
Maximum allowed overtime 10% per month
Inventory carrying cost 50 \$ per unit per year
Change in production level cost 100 \$ per uniu
Initial Inventory 200 Units
Subcontracting 15 \$ per unit

The cost of labor for additional labor 50 \$ per unit
The cost of labor for unit produced in overtime 75 \$ per unit
The cost of production with subcontracting 65 \$ per unit
Since cost of subcontracting is less than cost of overtime worker. The subcontracting will be preferred over overtime. So there is no need to evaluate that case
NOTE: Subcontracting is done outside the company, so subcontracting will not require any cost of chage in production level.
ASSUMPTION: The ending inventory is assumed as 200
The current production level is 500
ASSUMPTION: Inventory carrying cost for a month is applicable on the beginning inventory for that month

LEVEL STRATEGY
Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Demand 600 700 800 700 600 500 600 700 800 900 700 600 8200
Production 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 8200