OM (with OM Online, 1 term (6 months) Printed Access Card)
OM (with OM Online, 1 term (6 months) Printed Access Card)
6th Edition
ISBN: 9781305664791
Author: David Alan Collier, James R. Evans
Publisher: Cengage Learning
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Chapter 13, Problem 5PA
Summary Introduction

Interpretation:

Costs of level and chase demand production plans.

Concept Introduction:

Chase strategy is a strategy used by company to meet uncertain demands of customers. Company produces so much goods that there is enough inventory for end users. This strategy is used usually by companies to optimally reduce cost of inventory.

Expert Solution & Answer
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Answer to Problem 5PA

The total cost using chase strategy is $546,240.

Explanation of Solution

Given information:

    Month J F M A M J J A S O N D
    Litres (1000s)
    200

    120

    75

    40

    15

    7

    5

    10

    30

    70

    120

    130

Following is the step wise calculation of level strategy (Note − units in 1,000 liters)

Following is the calculation of holding inventory Holding inventory = Normal Production + On-hand inventory − Demand

Holding inventory = 100 + 90 − 200

Holding inventory / Shortage = 10

The holding inventory / shortage is 10 units

Following is the calculation of Normal Production cost Normal Production cost = Normal production × 400

Normal Production cost = 90 × 400

Normal Production cost = $36,000

Following is the holding cost Holding cost = Holding inventory × 30

Holding cost = 15 × 30

Holding cost = $450

Following is the total cost Total cost = Normal production cost + Holding inventory cost

Total cost = 36000 + 450

Total cost = $36,450

Following is the calculation of level strategy

    J F M A M J J A S O N D
    Demand
    200

    120

    75

    40

    15

    7

    5

    10

    30

    70

    120

    130
    On-handDelivery
    100

    0

    0

    11

    65

    140

    223

    308

    388

    448

    468

    438
    Normal production
    90

    90

    90

    90

    90

    90

    90

    90

    90

    90

    90

    90
    Holding inventory
    15

    65

    140

    223

    308

    188

    448

    408

    438

    348
    Units shortage
    10

    30
    Level strategy cost
    Normalproduction36,00036,00034,00036,00036,00036,00036,00036,00036,00036,00036,00036,000
    Holding cost 0 0 45019504,200609092401164013,440140401314010440
    Total cost36,00036,00034,45037,95040,20042,09041,24047,64049,44050,0404914046,440
    I F M A M I J A S O N D
    Demand
    200

    120

    75

    40

    15

    7

    5

    10

    30

    70

    120

    130
    On-handDelivery
    100

    0

    0

    11

    65

    140

    223

    308

    388

    448

    468

    438
    Normal production
    90

    90

    90

    90

    90

    90

    90

    90

    90

    90

    90

    90
    Holding inventory
    15

    65

    140

    223

    308

    188

    448

    408

    438

    348
    Units shortage
    10

    30
    Level strategy cost
    Normalproduction36,00036,00034,00036,00036,00036,00036,00036,00036,00036,00036,00036,000
    Holding cost 0 0 45019504,200609092401164013,440140401314010440
    Total cost36,00036,00034,45037,95040,20042,09041,24047,64049,44050,0404914046,440

Total cost 517,230The total cost using level strategy is $517,230 Following is the step wise calculation of chase strategy

(Note − units in 1,000 liters)

Following is the Overtime cost

Overtime cost = Normal production cost + Normal production cost × 20%

Overtime cost = 400 + 400 × 20%

Overtime cost = 400 + 80

Overtime cost = $480

Following is the Undertime cost

Undertime cost = Normal production cost + Normal production cost × 20%

Undertime cost = 400 + 400 × 12%

Undertime cost = 400 + 48

Undertime cost = $448

Following is the calculation of chase strategy

Chase Strategy

    I F M A M I J A S O N D
    Demand
    200

    120

    75

    40

    15

    7

    5

    10

    30

    70

    120

    180
    On-handDelivery
    100

    0

    0

    0

    0

    0

    0

    0

    0

    0

    0

    -
    Normal production
    90

    90

    75

    40

    915

    7

    5

    10

    30

    70

    90

    90
    Holding inventory
    0

    0

    0

    0

    0

    0

    0

    0

    -

    -
    Units shortage
    10

    30

    30

    90
    Chase strategy cost
    Normalproduction36,00036,00030,00016,0006,0002,8002,0004,00012,00028,00036,00036,000
    Holding cost 4,800 14,400 7,200
    24,000
    36,00039,84040,80038,40028,8009,60014,40041,200
    Total cost40,80050,40037,20040,00042,00042,68042,80042,40040,80037,60050,40079,200

Chase strategy

    I F M A M I J A S O N D
    Demand
    200

    120

    75

    40

    15

    7

    5

    10

    30

    70

    120

    180
    On-handDelivery
    100

    0

    0

    0

    0

    0

    0

    0

    0

    0

    0

    -
    Normal production
    90

    90

    75

    40

    915

    7

    5

    10

    30

    70

    90

    90
    Holding inventory
    0

    0

    0

    0

    0

    0

    0

    0

    -

    -
    Units shortage
    10

    30

    30

    90
    Chase strategy cost
    Normalproduction36,00036,00030,00016,0006,0002,8002,0004,00012,00028,00036,00036,000
    Holding cost 4,800 14,400 7,200
    24,000
    36,00039,84040,80038,40028,8009,60014,40041,200
    Total cost40,80050,40037,20040,00042,00042,68042,80042,40040,80037,60050,40079,200

Total cost = 5,46,240

The total cost using chase strategy is $546,240.

It is recommended for the company to use level strategy as its cost are less compared to chase strategy.

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