Question: A small textile company makes several types of sweaters. Demand is very seasonal, as shown by the following quarterly demand estimates. Demand is estimated in terms of standard hours of production required.
An hour of regular time costs the company $12. Employees are paid $18 per hour on overtime, and labor can be subcontracted from the outside at $14 per hour. A maximum of 1000 overtime hours is available in any month. A change in the regular level of production (increase or decrease) incurs a onetime cost of $5 per hour for adding or subtracting an hour of labor. It costs 2 percent per month to carry an hour of finished work in inventory. Materials and overhead costs in inventory are equal to the direct labor costs. At the beginning of the fall quarter, there are 5000 standard hours in inventory and the workforce level is equivalent to 10,000 standard hours.
a. Suppose management sets the level of regular workers for the year equal to the average demand and subcontracts out the rest. What is the cost of this strategy?
b. What is the cost of a chase strategy?