The Austin, Texas plant of Computer Products produces disk units for personal and small business computers. Gerald Knox, the plant’s production planning director, is looking over next year’s sales forecasts for these products and will be developing an aggregate capacity plan for the plant. The quarterly sales forecasts for the disk units are as follows:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
| 2,430 | 2,610 | 2,700 | 2,520 |
Ample machine capacity exists to produce the forecast. Each disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:
a) help me, maintain a work force capable of producing 2,520 in a quarter outsourcing any disk units over this quantity. Excess units produced in a quarter would be carried over to meet demand in a subsequent quarter. Any additional demand is met through outsourcing. All workers will be fully utilized each quarter. In other words, there is no under utilization. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs.
b) The company will maintain a work force capable of producing 2,340 units in a quarter. It will utilize overtime to meet all demand that cannot be met with its own workforce. All workers will be fully utilized each quarter. In other words, there is no under utilization. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs.
Effective capacity planning is crucial for any manufacturing plant to optimize costs and meet customer demand efficiently. In this scenario, we will explore two different capacity planning options for the Austin, Texas plant of Computer Products, which produces disk units for personal and small business computers. The objective is to minimize costs while ensuring that customer demand is met.
Maintain a Workforce Capable of Producing 2,520 Units per Quarter, Outsourcing Excess Demand:
In this option, the plant aims to maintain a workforce capable of producing 2,520 disk units per quarter, with excess units being outsourced. Let’s break down the costs associated with this strategy.
Labor Costs:
The plant works 12 five-day weeks, 6 hours per day. Therefore, each quarter has 360 hours (12 weeks * 5 days * 6 hours).
Each disk unit takes an average of 20 labor-hours, so the labor cost per disk unit is (20 hours * labor rate).
Hiring and Layoff Costs:
Hiring a worker costs $800, and laying off a worker costs $950.
Backlog Costs:
Backlog costs are incurred if there is demand that cannot be met within the quarter. The costs are $300 for the first quarter, $700 for the second quarter, and $900 for the third quarter.
Inventory Holding Costs:
Inventory holding cost is $100 per disk unit per quarter. It applies to the units in inventory at the end of each quarter.
Outsourcing Costs:
Outsourcing cost is $480 per disk unit.
Calculations
Labor Costs = (360 hours * labor rate) per quarter.
Hiring and Layoff Costs = (Number of workers hired/layoff * respective cost).
Backlog Costs = (Backlog units * backlog cost per quarter).
Inventory Holding Costs = (Ending inventory units * holding cost per quarter).
Outsourcing Costs = (Outsourced units * outsourcing cost).
Total Cost for Option A = Labor Costs + Hiring and Layoff Costs + Backlog Costs + Inventory Holding Costs + Outsourcing Costs.
Maintain a Workforce Capable of Producing 2,340 Units per Quarter, Utilize Overtime:
In this option, the plant maintains a workforce capable of producing 2,340 units per quarter and utilizes overtime to meet excess demand. Here’s a breakdown of the costs:
Labor Costs:
The plant still works 360 hours per quarter, but overtime work is paid at 150% of the straight time labor rate.
Hiring and Layoff Costs:
Same as in Option A.
Backlog Costs:
Same as in Option A.
Inventory Holding Costs:
Same as in Option A.
Outsourcing Costs:
Same as in Option A.
Calculations:
Labor Costs = (360 hours * labor rate) + (overtime hours * overtime rate) per quarter.
Other costs (Hiring, Layoff, Backlog, Inventory Holding, Outsourcing) are calculated similarly to Option A.
Total Cost for Option B = Labor Costs + Hiring and Layoff Costs + Backlog Costs + Inventory Holding Costs + Outsourcing Costs.
By analyzing both options, the plant can determine which strategy minimizes costs while meeting customer demand efficiently. The chosen option should take into account factors such as workforce flexibility, overtime utilization, and backlog costs, ultimately aligning with the company’s strategic goals and financial objectives.
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