Overtime or the material related acquisition cost

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Reference no: EM133446631

The Austin, Texas plant of Computer Products produces disk units for personal and small business computers. Gerald Knox, the plant's production planning director, is looking over next year's sales forecasts for these products and will be developing an aggregate capacity plan for the plant. The quarterly sales forecasts for the disk units are as follows and we will assume that these are accurate:

1^st Quarter	2^nd Quarter	3^rd Quarter	4^th Quarter
2,520	2,700	2,520	2,610

Ample machine capacity exists to produce the forecast. Each disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:

a. Inventory carrying cost is $100 per disk unit per quarter. The inventory to use in this calculation is the inventory at the end of the quarter. Any inventory carried over from a quarter will always be the first inventory used to fill the demand in a subsequent quarter.

b. The plant works the same number of days in each quarter, 12 five-day weeks, 6 hours per day.

c. There is no inventory at the beginning of the year.

d. The cost of hiring a worker is $800 while the cost of laying off a worker is $950.

e. The straight time labor rate is $22 per hour during the entire year.

f. Overtime work is paid at time and a half (150%) of the straight time work.

g. Outsourcing (contract work) is paid at the rate of $475 per disk unit for the labor and you provide the material

h. The number of workers the company had at the end of last year could produce 2,430 units per quarter working at full utilization. The demand for the first quarter of the next year (year following the year you are analyzing) is projected to be at the 2,700 unit level.

i. In a backlog situation, the customer will wait for his order to be filled but will expect a price reduction each quarter he waits. The backlog costs are $300 per disk unit for the first quarter the customer waits, $700 for the second quarter the customer waits, and $900 for the third quarter the customer waits. In filling orders, backlog items will always be filled before current quarter items,

Which of the following plans would provide the lowest production cost? Assume that the material and overhead costs are the same in each plan.

i) There will be a reduction in 5 workers from the workforce used at the end of last year that could produce 2,430 units per quarter working at full utilization. The reduced workforce will be held constant throughout the year. If the workforce can produce more units during a quarter then there is demand, the workers will still produce all of the units so there is no underutilization. These units will be used to meet demand in future quarters. Any additional units required in a quarter that cannot be produced with the given workforce will be obtained through overtime. Do not consider the cost of the process improvements or the material related acquisition cost.

ii) A form of level production where the company successfully shifted the demand so that it is uniform (constant) throughout the entire year. To compete this, the company has to reduce the price of each unit exceeding the average quarterly demand to another quarter by $300. The number of workers used will match the demand so there will be no underutilization and no overtime or the material related acquisition cost.

Reference no: EM133446631

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