Question

The Cut-Rite Company is a major producer of industrial lawn mowers. The cost to Cut-Rite for hiring a semi-skilled worker for its assembly plant is $3000, and the cost for laying off one worker is $2000. With its current work force of 720 workers, the plant can produce 36,000 lawn mowers per quarter. Regular-time capacity in any quarter is directly proportional to the number of employees. Overtime is limited to a maximum of 5,000 mowers per quarter. The costs to produce one mower are $300 on regular time (including materials), and $350 on overtime. Unused regular-time capacity costs $40 per mower. No additional cost is incurred for unused overtime. The current level of inventory is 4,000 mowers, and management wants to end the year at that same level. Customers do not tolerate backorders, and holding a mower in inventory costs $60 per quarter. The forecasted demand for mowers this coming year is

Quarter	1	2	3	4
Demand	10,000	41,000	67,000	34,000

1. Determine the cost of a chase strategy (without using overtime) that adjusts the production capacity in each quarter by hiring and firing.

2. Determine the cost of a level strategy (without using overtime) that uses a constant work force throughout the year.

Answer 1

Cut-Rite Company
hiring cost	$            3,000
laying off cost	$            2,000
current workforce	720	workers
quarterly capacity	36,000	mowers/qtr
capacity/worker/qtr	50	mowers
maximum OT	5,000	mowers/qtr
regular time cost	$                300	per mower
OT cost	$                350	per mower
unused regular time capacity cost	$                  40	per mower
beginning inventory	4,000	mowers
year-end inv	4,000	mowers
holding cost	$                  60	per qtr per mower
CHASE STRATEGY:
qtr	demand	beg inv	regular production	end inv	manpower	nos. hired	nos. fired	unused regular time
1	10,000	4,000	6,000	-	120	0	600	-
2	41,000	-	41,000	-	820	700	0	-
3	67,000	-	67,000	-	1,340	520	0	-
4	34,000	-	38,000	4,000	760	0	580	-
Total	1,52,000	4,000	1,52,000	4,000	3,040	1,220	1,180	-
hiring cost	$     36,60,000
Laying off cost	$     23,60,000
inventory holding cost	$       2,40,000
unused regular time cost	$                   -
regular time cost	$ 4,56,00,000
Total Cost	$ 5,18,60,000
LEVEL STRATEGY:
average demand	38,000	mowers/qtr
manpower reqd	760	workers
qtr	demand	beg inv	regular production	end inv	manpower	nos. hired	nos. fired	unused regular time
1	10,000	4,000	38,000	32,000	760	40	0	-
2	41,000	32,000	38,000	29,000	760	0	0	-
3	67,000	29,000	38,000	-	760	0	0	-
4	34,000	-	38,000	4,000	760	0	0	-
Total	1,52,000	65,000	1,52,000	65,000	3,040	40	-	-
hiring cost	$       1,20,000
Laying off cost	$                   -
inventory holding cost	$     39,00,000
unused regular time cost	$                   -
regular time cost	$ 4,56,00,000
Total Cost	$ 4,96,20,000