Question

A company is interested in developing a quarterly aggregate production plan but they are not sure if a level strategy with backorders or a chase strategy would be better. They have the following information available regarding their production operation: Hiring Cost (per unit increase) $40 Firing (per unit decrease) $80 Inventory Cost (per unit) $40 Stockout (per unit) $150 Production (Labor) cost (per unit) $30 Subcontracting cost (per unit) $60 Previous quarter's production 1300 Previous quarter's ending inventory 0 Quarter forecasts are 4000, 3000, 4000 and 5000, respectively. Suppose that you want to use a level plan with backorders (one that produces at the average demand over the four quarters). What is the ending inventory in Quarter 2

Answer 1

1000 units

Step-by-step explanation:

Average demand over the next 4 quarters = (4000 + 3000 + 4000 + 5000) / 4

Average demand over the next 4 quarters = 16000 / 4

Average demand over the next 4 quarters = 4000

That is, as per the Level plan, 4000 units shall be produced in each of the next 4 quarters.

Quarter 1

Beginning Inventory = 0

Production = 4000

Demand = 4000

Ending Inventory = (Beginning Inventory + Production) - Demand

Ending Inventory = (0 + 4000) - 4000

Ending Inventory = 4000 - 4000

Ending Inventory = 0 units

Quarter 2

Beginning Inventory = 0

Production = 4000

Demand = 3000

Ending Inventory = (Beginning Inventory + Production) - Demand

Ending Inventory = (0 + 4000) - 3000

Ending Inventory = 4000 - 3000

Ending Inventory = 1000 units