Question

A operations manager of Cummins Engines, a producer of lawn movers and leaf blowers, must develop an aggregate plan given the forecast for engine demand shown in the below table. The department has a regular output capacity of 130 engines per month. Regular output has a cost of $60 per engine. The beginning inventory is zero engines. Overtime has a cost of $90 per engine.

a. Develop a chase plan that matches the forecast and compute the total cost of your plan.
b. Compare the costs of a level plan that uses inventory to absorb fluctuations. The inventory carrying cost is $2 per engine per month. The backlog cost is $90 per engine per month. There should not be a backlog in the last month. Assume that using overtime is not an option.

Answer 1

To develop the chase plan, match the forecasted engine demand and calculate the total cost. To compare the costs of a level plan, consider the inventory carrying cost and backlog cost. Calculate the total cost of the level plan by considering the carrying cost and backlog cost for each month.

Step-by-step explanation:

To develop the chase plan, we need to match the forecasted engine demand. In this case, the forecasted demand is shown in the table below:

MonthDemand1120215031004140

Since the regular output capacity is 130 engines per month, the plan will involve producing exactly the forecasted demand each month.

The total cost of the chase plan can be calculated by multiplying the regular output cost ($60 per engine) by the number of engines produced each month and summing them up:

Total cost = (120 * $60) + (150 * $60) + (100 * $60) + (140 * $60)

Similarly, to compare the costs of a level plan, we need to consider the inventory carrying cost and backlog cost. Since using overtime is not an option, the level plan will involve producing a certain number of engines each month and using inventory to absorb any fluctuations. The calculation of the total cost for the level plan will involve considering the carrying cost ($2 per engine per month) for any inventory carried over from previous months and the backlog cost ($90 per engine per month) for any backlog created each month.

The total cost of the level plan can be calculated by multiplying the carrying cost and backlog cost by the respective number of engines carried or backlogged each month and summing them up.