Chapter 13 problems 13.3: The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate demand requirements over the next 8 months as follows: Her operations manager is considering a new plan, which begins in January with 200 units on hand. Stockout cost of lost sales is $100 per unit. Inventory holding cost is $20 per unit per month. Ignore any idle-time costs. The plan is called plan A. Plan A: Vary the workforce level to execute a “chase” strategy by producing the quantity demanded in the prior month. The December demand and rate of production are both 1,600 units per month. The cost of hiring additional workers is $5,000 per 100 units. The cost of laying off workers is $7,500 per 100 units. Evaluate this plan. Ans: Stock on Hand 200 unit Month
Demand
Dec
Production
Hire
Layoff
Cost
400
$30,000
1600
Jan
1400
1200
Feb
1600
1600
400
$20,000
Mar
1800
1800
200
$10,000
Apr
1800
1800
May
2200
2200
Jun
2200
2200
Jul
1800
1800
400
$30,000
Aug
1400
1400
400
$30,000
$0 400
$20,000 $0
$140,000
Total cost for the plan ‘A’ works out to be $140,000.
Chapter 13 problems 13.5: Hill is now considering plan C. Beginning inventory, stockout costs, and holding costs are provided in Problem 13.3: a) Plan C: Keep a stable workforce by maintaining a constant production rate equal to the average requirements and allow varying inventory levels.
Ans: The average requirement is found by summing the total demand from January through August, and dividing the result by 8 months to find 1,775 units per month.
Month
Demand
Production
Dec
Ending Inv.
Stock-out
Cost
200
Jan
1400
1775
575
$11,500
Feb
1600
1775
750
$15,000
Mar
1800
1775
725
$14,500
Apr
1800
1775
700
$14,000
May
2200
1775
275
$5,500
Jun
2200
1775
0
150
$15,000
Jul
1800
1775
0
25
$2,500
Aug
1400
1775
375
$7,500 $85,500
Total cost for the plan is $85,500. We would recommend plan C over plan A.
b) Plot the demand with a graph that also shows average requirements. Conduct your analysis for January through August.
Demand Chart
Average Requirement
We we can see that the demand from January till February is below the average requirement and then from March till July the demand is above the the average requirement and then in the month of August, the demand goes below the average requirement. Chapter 13 problems 13.9: Mary Rhodes, operations manager at Kansas Furniture, has received the following estimates of demand requirements: July Aug. Sept. Oct. Nov. Dec. 1,000 1,200 1,400 1,800 1,800 1,600 a) Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per unit per month, and zero beginning and ending inventory, evaluate these two plans on an incremental cost basis: • Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month and subcontract additional units at a $60 per unit premium cost. • Plan B: Vary the workforce, which performs at a current production level of 1,300 units per month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of layoffs is $6,000 per 100 units cut back. Ans:
Plan A
Month
Dema nd
June
Producti on
End of period Inventory
Sub Contract Units
Invent ory Cost
Subcontra ct Cost
1000
July
1000
1000
0
0
0
0
August
1200
1000
0
200
0
12000
Septemb er
1400
1000
0
400
0
24000
October
1800
1000
0
800
0
48000
Novemb er
1800
1000
0
800
0
48000
Decemb er
1600
1000
0
600
0
36000
Total Cost
Plan B
$ 168000
Month
Dema nd
June
Producti on
Hire
Hire Cost
Layof
Layof Cost
1300
July
1000
1000
0
300
0
18000
August
1200
1200
200
0
6000
0
Septemb er
1400
1400
200
0
6000
0
October
1800
1800
400
0
12000
0
Novembe r
1800
1800
0
0
0
0
Decembe r
1600
1600
0
200
0
12000
24000
30000
Total Cost
Total Cost in Plan B = 30000+24000 = $ 54000 b) Which plan is best and why? Ans: Comparing both the plan, we find that Plan B is better. Chapter 13 problems 13.21: Forrester and Cohen is a small accounting firm, managed by Joseph Cohen since the retirement in December of his partner Brad Forrester. Cohen and his 3 CPAs can together bill 640 hours per month. When Cohen or another accountant bills more than 160 hours per month, he or she gets an additional “overtime” pay of $62.50 for each of the extra hours: This is above and beyond the $5,000 salary each draws during the month. (Cohen draws the same base pay as his employees.) Cohen strongly discourages any CPA from working (billing) more than 240 hours in any given month. The demand for billable hours for the firm over the next 6 months is estimated below: Month
Estimate of Billable
Hours
Jan
600
Feb
500
Mar
1000
Apr
1200
May
650
Jun
590
Cohen has an agreement with Forrester, his former partner, to help out during the busy tax season, if needed, for an hourly fee of $125. Cohen will not even consider laying off one of his colleagues in the case of a slow economy. He could, however, hire another CPA at the same salary, as business dictates. Refer to the CPA firm in Problem 13.20. In planning for next year, Cohen estimates that billable hours will increase by 10% in each of the 6 months. He therefore proceeds to hire a fifth CPA. The same regular time, overtime, and outside consultant (i.e., Forrester) costs still apply. a) Develop the new aggregate plan and compute its costs. Ans: Cost with the 1st plan of 4 CPA’s and using Forrester as outside consultant (Previous aggregate plan)
Month
Estimate of Billable Hours
Capacit y
Extra Hours
Regular Cost
Overtim e
Forreste r
Total Cost
Jan
600
640
-40
20000
0
0
20000
Feb
500
640
-140
20000
0
0
20000
Mar
1000
640
360
20000
20000
5000
45000
Apr
1200
640
560
20000
20000
30000
70000
May
650
640
10
20000
625
0
20625
Jun
590
640
-50
20000
0
0
20000
Total Cost
19562 5
Cost with the 2nd plan of 5 CPA’s and using Forrester as outside consultant with increased billable hours (New aggregate plan)
Month
Estimate of Billable Hours
Capaci ty
Extra Hours
Regular Cost
Overtim e
Forrest er
Total Cost
Jan
660
800
-140
25000
0
0
25000
Feb
550
800
-250
25000
0
0
25000
Mar
1100
800
300
25000
18750
0
43750
Apr
1320
800
520
25000
25000
15000
65000
May
715
800
-85
25000
0
0
25000
Jun
649
800
-151
25000
0
0
25000
Total Cost
20875 0
b) Comment on the staffing level with five accountants. Was it a good decision to hire the additional accountant? Ans: With five accountants, the total cost is higher compared to the 1st plan of 4 CPA’s. So, I don’t think that it was a good decision to hire the additional accountant.
