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Level versus chase strategy: Aggregate production plan

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?
The following excerpt is from the email sent to all students in the class, 'After reviewing the assignment, I have decided to allow you to stock-out inventory--reach zero inventory--in the Level strategy for any month except the year end, which still has to be +/- 10% of the 200 inventory.'
Stock-out and Year-end replenishment of inventory to +/- 10% of 200 are two different issues. Stock-out may occur during the year, but beginning-of-year inventory is 200 units and end-of-year inventory must be +/- 10% of 200 units.

Please see attached.


Solution Preview

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 200 (equal to beginning inventory), therefore the entire forecast is to be managed through production in the year
ASSUMPTION: The production level in last december was 500
ASSUMPTION: Inventory carrying cost for a month is applicable on the beginning inventory for that month

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 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 683.3333333 8200

Case-1-Using additional labor
Beginning inventory 200 283.3333333 266.6666667 150 133.3333333 216.6666667 400 483.3333333 466.6666667 350 133.3333333 116.6666667 3200
Ending ...

Solution Summary

This problem explains how to prepare the production plan with different work force management plans. It tackles two different strategies - level and chase. The solution is presented in Excel model format to make it easy to understand and see how changes in different variables will have an impact on the total cost.