The S&OP team at Kansas Furniture, has received the following estimates of demand requirements:

a) Assuming one-time 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 1,000 units per month and subcontract additional units at a $60 per unit premium cost.
—† Plan B: Vary the workforce, to produce the prior month's demand. The fi rm produced 1,300 units in June. The cost of hiring additional workers is $3,000 per 100 units produced.
The cost of layoff s is $6,000 per 100 units cut back.
Both hiring and layoff costs are incurred in the month of the change, (i.e. going from production of 1,300 in July to 1,000 in August requires a layoff (and related costs) of 300 units in August, just as going from production of 1,000 in August to 1,200 in September requires hiring (and related costs) of 200 units in September).
b) Which plan is best and why?

Transcribed Image Text:

July 1,000 Aug. Sept 1,400 Nov. 1,800,8001.800 xi. Dec. 1,200