The Austin, Texas plant of Computer Products produces 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 disk units are as follows:
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1st Quarter
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2nd Quarter
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3rd Quarter
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4th Quarter
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2440
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2610
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2610
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2520
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Ample machine capacity exists to produce the forecast. Each disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:
a. Inventory carrying cost is $100 per disk unit per quarter.The cost is applied to all units in inventory at the end of a quarter.
b. The plant works the same number of days in each quarter, 12 five-day weeks, 6 hours per day.
c. There are 100 units on hand at the beginning of the first quarter and these will be used to help meet the first quarter demand.
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 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 filling orders, backlogged items will always be filled before current quarter items,
e. The cost of hiring a worker is $800 while the cost of laying off a worker is $950. Workers hired during a quarter are able to produce at full utilization for the quarter.
f. The straight time labor rate is $20 per hour for the first quarter and increases to $23 per hour starting in the third 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 during the fourth quarter of the prior year was 2,430 and this was met by a workforce working full utilization with no overtime.
j. The demand for the first quarter of the next year (year following the year you are analyzing) is projected to be at the 2,610 unit level.
Compare the following three sales and operations plans.
i) Computer Products is planning on using a work force capable of producing 2520 units in any quarter. If all of the production is not required in a quarter, all of the workers will continue to be employed and there will be underutilization. During Quarters 1 and 2, it will meet any demand not filled with this workforce working straight time through a combination of overtime and outsourcing. Overtime and outsourcing will each produce 50% of the demand not met through straight time production by the company's workforce. Beginning in Quarter 3, the company will use a matching demand strategy. Ignoring the material cost, what is the total cost to produce the disks for the year? All workers will be fully utilized each quarter, in other words, there is no underutilization.
ii) A form of level production where the total number of disk units needed during the year are produced during the year. Production is to be at a uniform (constant) rate throughout the entire year. All workers will be fully utilized each quarter, in other words, there is no underutilization. In any quarter, when there are backlog items from the prior quarter, these will be given priority in being filled over current quarter items. What is the total cost of this option, excluding the material cost?
iii) As an alternative, the company will maintain a staff capable of producing 2,340 units in a quarter working at full utilization. It works overtime for any demand over 2,340 in a quarter. What is the total cost of this option, excluding the material cost? All workers will be fully utilized each quarter, in other words, there is no underutilization.