Question

Rahul, operations manager at a furniture store has received the following estimates of demand requirements: July August September 1400 1000 1200 October November 1800 1800 December 1600 Assuming stockout costs for lost sales of Rs.100 per unit, inventory carrying Inventory, evaluate these two plans based on overall costs: costs of Rs.25 per unit per month,

a. Plan A: Produce at a steady rate (equal to minimum requirement) of 1000 units per month and subcontract additional units at a Rs.60 per unit premium cost.
b. Plan B: Vary the workforce, which performs at a current production level of 1300 units per month. The cost of hiring additional workers is Rs. 3000 units per 100 units produced. The cost of layoffs is Rs. 6000 per 100 units cut back.

Answer 1

The best production method is Method 1, with a total cost of $9000. If the cost of labor rises to $200/unit, Method 1 would still be the best choice

Step-by-step explanation:

To determine the best production method, we need to calculate the total cost for each method. Let's calculate the total cost for each method with the given cost of labor and capital:

Method 1: Cost = (50* labor cost) + (10* capital cost) = (50*$100) + (10*$400) = $5000 + $4000 = $9000

Method 2: Cost = (20* labor cost) + (40* capital cost) = (20*$100) + (40*$400) = $2000 + $16000= $18000

Method 3: Cost = (10* labor cost) + (70* capital cost) = (10*$100) + (70*$400) = $1000 + $28000 = $29000

Based on these calculations, the best production method is Method 1 with a total cost of $9000. If the cost of labor rises to $200/unit, the total cost for each method will be:

Method 1: $14000, Method 2: $22000, Method 3: $38000.

Therefore, the company should continue using Method 1 as it still has the lowest total cost even with the increased labor cost.