Question: 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?