Mary Rhodes, operations manager at Kansas Furniture has received the following estimates of demand requirements:
July Aug Sept Oct Nov Dec
1,000 1,200 1,400 1,800 1,800 1,600
Assuming stock out cost for lost sales of $100 per unit, inventory carrying cost of $25 per unit per month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis:
Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.
Plan B: Vary the workforce, which performs at a current production level of 1,300 units per month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back.