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.

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 $\times$ 400

Normal Production cost = 90 $\times$ 400

Normal Production cost = $36,000

Following is the holding cost Holding cost = Holding inventory $\times$ 30

Holding cost = 15 $\times$ 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
Normalproduction	36,000	36,000	34,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000
Holding cost	0	0	450	1950	4,200	6090	9240	11640	13,440	14040	13140	10440
Total cost	36,000	36,000	34,450	37,950	40,200	42,090	41,240	47,640	49,440	50,040	49140	46,440

	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
Normalproduction	36,000	36,000	34,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000	36,000
Holding cost	0	0	450	1950	4,200	6090	9240	11640	13,440	14040	13140	10440
Total cost	36,000	36,000	34,450	37,950	40,200	42,090	41,240	47,640	49,440	50,040	49140	46,440

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 $\times$ 20%

Overtime cost = 400 + 400 $\times$ 20%

Overtime cost = 400 + 80

Overtime cost = $480

Following is the Undertime cost

Undertime cost = Normal production cost + Normal production cost $\times$ 20%

Undertime cost = 400 + 400 $\times$ 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
Normalproduction	36,000	36,000	30,000	16,000	6,000	2,800	2,000	4,000	12,000	28,000	36,000	36,000
Holding cost	4,800	14,400	7,200	24,000	36,000	39,840	40,800	38,400	28,800	9,600	14,400	41,200
Total cost	40,800	50,400	37,200	40,000	42,000	42,680	42,800	42,400	40,800	37,600	50,400	79,200

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
Normalproduction	36,000	36,000	30,000	16,000	6,000	2,800	2,000	4,000	12,000	28,000	36,000	36,000
Holding cost	4,800	14,400	7,200	24,000	36,000	39,840	40,800	38,400	28,800	9,600	14,400	41,200
Total cost	40,800	50,400	37,200	40,000	42,000	42,680	42,800	42,400	40,800	37,600	50,400	79,200

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.