Andrew-Cater, Inc. (A-C), is a major Canadian producer and distributor of outdoor lighting fixtures. Its products are distributed through South and North America and have been in high demand for several years. The company operates three plants to manufacture fixtures and distribute them to five distribution centers (warehouses).
During the present global slowdown, A-C has seen a major drop in demand for its products, largely because the housing market has declined. Based on the forecast of interest rates, the head of operations feels that demand for housing and thus for A-C's products will remain depressed for the foreseeable future. A-C is considering closing one of its plants, as it is now operating with a forecast excess capacity of 34,000 units per week. The forecast weekly demands for the coming year are as follows:
|
Warehouse 1
|
9,000
|
units
|
|
Warehouse 2
|
13,000
|
|
|
Warehouse 3
|
11,000
|
|
|
Warehouse 4
|
15,000
|
|
|
Warehouse 5
|
8,000
|
|
Plant capacities, in units per week, are as follows:
|
Plant 1, regular time
|
27,000
|
units
|
|
Plant 1, on overtime
|
7,000
|
|
|
Plant 2, regular time
|
20,000
|
|
|
Plant 2, on overtime
|
5,000
|
|
|
Plant 3, regular time
|
25,000
|
|
|
Plant 3, on overtime
|
6,000
|
|
If A-C shuts down any plats, its weekly costs will change, because fixed costs will be lower for a no operating plant. Table 1 shows production costs at each plant, both variable at regular time and overtime, and fixed when operating and shut down. Table 2 shows distribution costs from each plant to each distribution center.
Table 1: Viable Costs and Fixed Production Costs per week
|
Plant
|
Variable Cost (per unit)
|
Fixed Cost per Week
|
|
Operating
|
Not Operating
|
|
|
1, regular time
|
$2.80
|
$14,000
|
$6,000
|
|
1, overtime
|
3.52
|
|
|
|
2, regular time
|
2.78
|
12,000
|
5,000
|
|
2, overtime
|
3.48
|
|
|
|
3, regular time
|
2.72
|
15,000
|
7,500
|
|
3, overtime
|
3.42
|
|
|
Table 2: Distribution Costs per Unit
|
From Plants
|
To Distribution Centers
|
|
W1
|
W2
|
W3
|
W4
|
W5
|
|
1
|
$.50
|
$.44
|
$.49
|
$.46
|
$.56
|
|
2
|
.40
|
.52
|
.50
|
.56
|
.57
|
|
3
|
.56
|
.53
|
.51
|
.54
|
.35
|
Discussion Questions
- Evaluate the various configurations of operating and closed plants that will meet weekly demand. Determine which configuration minimizes total costs.
Discuss the implication of closing a plant.