Valbec Company manufactures and distributes toy doll houses. Because the toy industry is a seasonal business, a large portion of Valbec's sales occur in the late summer and fall. The projected sales in units for the year 20A follow:
January .................................... 8,000
February ................................... 8,000
March ....................................... 8,000
April ........................................ 8,000
May ......................................... 8,000
June ......................................... 10,000
July ......................................... 12,000
August ..................................... 12,000
September ................................. 13,000
October .................................... 13,000
November ................................. 12,000
December ................................. 8,000
With a sales price of $10 per unit, sales revenue for the year 20A is projected to be $ 1,200,000. Valbec scheduled its production in the past so that finished goods inventory at the end of each month, exclusive of a safety stock of 4,000 units, would equal the next month's sales. One-half hour of direct labor is required to produce each unit under normal operating conditions. January, 20B sales are estimated to be 8,000 units.
The present labor force limits monthly production capacity to 8,000 units (4,000 direct labor hours). Although overtime is feasible, management wants to consider two other possible alternatives: (a) hire temporary help from an agency during the peak months, or (b) expand its labor force and adopt a level production schedule. Use of a second shift is not being considered.
Factory employees are paid $6 per hour for regular time, and fringe benefits average 20% of regular pay. For work in excess of 4,000 hours per month, employees receive time and a half; fringe benefits on these additional wages average only 10%. Past experience has shown that when overtime is required, labor inefficiencies occur during overtime work, which increases by 5% the overtime normally expected (the number of overtime hours required to accomplish a certain level of production increases by 5%). Temporary workers can be hired through an agency at the same labor rate of $6, but there are no fringe benefit costs. Management estimates that the temporary workers require 25% more time than regular employees to produce a unit of product. If Valbec goes to a level production schedule, the labor force will be expanded and no overtime would be required. The same labor rate ($6) and fringe benefit rate (20%) apply.
Manufacturing facilities have the capacity to produce 18,000 units per month and on-site storage facilities for completed units are adequate. The estimated annual cost of carrying inventory is $1 per unit. Valbec is subject to a 40% income tax rate.
Required:
(1) Compare the costs associated with each of the company's three alternatives: (a) schedule overtime hours, (b) hire temporary workers, and (c) expand the labor force and schedule level production of 10,000 units per month.
(2) What non cost factors should Valbec Company consider before making a final decision?