Question: A company produces to a seasonal demand, with the forecast for the next 12 months as given below.
| Month |
Demand |
| January |
600 |
| February |
700 |
| March |
800 |
| April |
700 |
| May |
600 |
| June |
500 |
| July |
600 |
| August |
700 |
| September |
800 |
| October |
900 |
| November |
700 |
| December |
600 |
The present labor force can produce 500 units per month. Each employee added can produce an additional 20 units per month and is paid $1000 per month. The cost of materials is $30 per unit. Overtime can be used at the usual premium of time and a half for labor up to a maximum of 10 percent per month. Inventory-carrying cost is $50 per unit per year. Changes in production level cost $100 per unit due to hiring, line changeover costs, and so forth. Assume 200 units of initial inventory. Extra capacity may be obtained by subcontracting at an additional cost of $15 per unit over and above the company's producing them itself on regular time.
1. Provide a detailed cost breakdown for using a level vs. a chase strategy to meet the increased demand.
2. Which strategy do you recommend?
3. How much savings would result from the plan you recommend?