2 example p13 14 to 13 18 this example is simplified

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2. Example – P.13-14 to 13-18.
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This example is simplified in two respects: All regular time labor that is employed in any period are assumed to be fully utilized in production (that is, there is no idle time). In order to simplify calculations, the workforce is hired/ fired in labor hour increments rather that is worker increments. An Example in Aggregate Planning Quarter Forecast in labor hours 1 200,000 2 320,000 3 180,000 4 260,000 The manufacturer uses these cost estimates: C R - Regular time production = $12.00 per labor hour C O - Overtime production = $18.00 per labor hour C I - Inventory carrying costs = $ 7.00 per labor hour/quarter C H - Hiring costs = $ 6.00 per labor hour C F - Firing costs = $ 3.00 per labor hour Assume that the existing labor force is 240,000 labor hours per quarter and that there is no beginning inventory.
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Overtime Only Policy Example of Trail and Error Spreadsheet Approach Planning Dimension Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total I t-1 0 R t 240 O t D t 200 320 180 260 I t H t 0 0 0 0 F t 0 0 0 0 Unit: (1000) The cost of this aggregate plan would be: TC= 12(960,000) +18(40,000) +7(140,000) = 13,330,000 0 40 0 60 40 140 40 240 40 0 240 0 60 240 0 960 40
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Hiring and Firing Policy Planning Dimension Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total I t-1 0 R t 240 O t 0 0 0 0 D t 200 320 180 260 I t H t F t (Unit:1,000) The cost of this aggregate plan would be: TC= 12(960,000)+18(0)+7(40,000)+6(120,000)+3(100,000) =12,820,000 40 0 0 0 40 0 40 280 0 180 0 260 960 0 40 120 100 0 0 100 0 80 0
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2. If each employee works 480 hours per quarter, how many employees (if any) do you plan to hire or fire in each quarter? Quarters Hiring/Firing No. of Workers Hired/Fired 1 No 2 Hiring 40,000/480 84 (Workers) 3 Firing 100,000/480 208 (Workers) 4 Hiring 80,000/480 167 (Workers)
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Given: Beginning Inventory = 25,000 (MH) Maximum Inventory = 100,000 (MH) [Warehouse limit] Minimum Inventory = 12,000 (MH) [Safety-Stock limit] Labor Hour/worker-Quarter = 480 (Regular time) Overtime/Quarter/worker = 120 Current Number of Workers = 200 Maximum Hiring/Quarter = 100 (Workers) No Subcontracting. Cost: C R = $4/MH C Hiring = $1,000 C Inv = 0.15/MH/Quarter C O = $6.00/MH C Firing = $2,000 Therefore: Regular Production= No. of workersX480 = 96,000
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Aggregate Production Plan Sheet Plan:1 Policy: Overtime only (in 1,000 units) Quarter 1 2 3 4 Total Beginning Inventory 25 Regular Production 96 96 96 96 Overtime Production Forecasted Demand 100 80 140 120 Labor-hours Hired ---- ---- ---- ---- Labor-hours Fired ---- ---- ---- ---- Safety Stock Ending Inventory Total Production Cost: = 4 X 384,000 + 6 X 43,000 + 0.15 X 82,000 = $1,806,300 21 37 12 384 43 24 19 0 0 0 0 0 0 21 37 12 12 82
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Aggregate Production Plan Sheet Plan:2 Policy: Hiring & Firing only (in 1,000 units) Quarter 1 2 3 4 Total Beginning Inventory 25 Regular Production 96 Overtime Production 0 Forecasted Demand 100 80 140 120 Labor-hours Hired Labor-hours Fired Safety Stock 12 12 12 12 Ending Inventory Total Production Cost: = $4X427,000 + (470,000/480)X1000+ (23,000/480)X2000+0.15X68,000 = $1,911,950 21 23 12 82 129 120 427 0 0 0 21 23 12 12 68 14 9 23 47 47
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Marginal Analysis (Before Mixed Strategy) (1) Tradeoff between Overtime vs. Inventory Cost (Per Manhour-Quarter) Overtime: = (16-4) = $2 Inventory Holding: = 0.15 Carry for 4 Quarter = 0.15X4= 0.60 < 2 So, when Demand increases, we prefer to use Inventory – Rather than overtime (2) Tradeoff between Hiring vs. Overtime: Hiring for one Quarter: =$1,000/480 = $2.08 > $2 (Overtime) Hiring for two Quarter: = $1,000/2X480 = $1.04 < $2(Overtime) So, if Hiring only needed for one Quarter- Prefer Overtime If Hiring needed for more than one Quarter- Prefer Hiring
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Tradeoff between Firing vs. Inventory:
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