A small textile company makes several types of sweat-ers. Demand is very seasonal, as shown by the follow-ing quarterly demand estimates. Demand is estimated in terms of standard hours of production required.
Fall Winter Spring Summer
Forecast 10,000 15,000 8000 5000
An hour of regular time costs the company $12. Employees are paid $18 per hour on overtime, and labor can be subcontracted from the outside at $14 per hour. A maximum of 1000 overtime hours is available in any month. A change in the regular level of production (increase or decrease) incurs a one-time cost of $5 per hour for adding or subtracting an hour of labor. It costs 2 percent per month to carry an hour of finished work in inventory. Materials and overhead costs in inventory are equal to the direct labor costs. At the beginning of the fall quarter, there are 5000 standard hours in inventory and the workforce level is equivalent to 10,000 standard hours.
a. Suppose management sets the level of regular workers for the year equal to the average demand and subcontracts out the rest. What is the cost of this strategy?
b. What is the cost of a chase strategy?
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Sets the level of regular workers for the year equal
a. Suppose management sets the level of regular workers for the year equal to the average demand and subcontracts out the rest. What is the cost of this strategy?
The average demand is 10,000 standard hours per quarter, so the company would hire 10,000 standard hours of regular workers per quarter. This would cost the company 10,000 standard hours * $12 per hour = $120,000 per quarter.
The remaining demand would be subcontracted out, which would cost the company 5,000 standard hours * $14 per hour = $70,000 per quarter.
The total cost of the strategy would be $120,000 + $70,000 = $190,000 per quarter.
b. What is the cost of a chase strategy?
The chase strategy would involve hiring and firing workers to match the demand each quarter. This would incur a one-time cost of $5 per hour for each change in the workforce level.
The total cost of the chase strategy would be the sum of the regular labor costs, the overtime labor costs, the subcontracting costs, and the workforce level change costs.
The regular labor costs would be 10,000 standard hours * $12 per hour = $120,000 per quarter.
The overtime labor costs would be 5,000 standard hours * $6 per hour = $30,000 per quarter.
The subcontracting costs would be 0 standard hours * $14 per hour = $0 per quarter.
The workforce level change costs would be 5,000 standard hours * $5 per hour = $25,000 per quarter.
The total cost of the chase strategy would be $120,000 + $30,000 + $0 + $25,000 = $175,000 per quarter.
Comparison of the two strategies
The level strategy has a lower cost than the chase strategy in the first quarter. However, the cost of the level strategy increases in the later quarters, while the cost of the chase strategy remains the same.
The level strategy is a good choice if the company expects demand to be relatively stable throughout the year. The chase strategy is a good choice if the company expects demand to fluctuate significantly from quarter to quarter.
Sample Solution
The average demand is 10,000 standard hours per quarter, so the company would hire 10,000 standard hours of regular workers per quarter.Our Services
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