Mary Rhodes, operations manager at Burnaby Furniture, has received the following estimates of demand requirements:

a) Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs 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 1000 units per month and subcontract additional units at a $60 per unit premium cost.
• Plan B: Vary the workforce, which performs at a current production level of 1300 units per month. The cost of hiring additional workers is $3000 per 100 units produced. The cost of layoffs is $6000 per 100 units cut back.

b) Which plan is best and why?

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