Aggregate Production Planning

Given data
January February March April May June Total

Beginning Inventory 400

Demand Forecast 1800 1500 1100 900 1100 1600 8000

Number of Working Days by Month 22 19 21 21 22 20 125

Initial number of workers available 53

Costs

Materials $100.00 $ per unit

Inventory holding cost $1.50 $ per unit per month

Marginal cost of stockout $5.00 $ per unit per month

Marginal cost of subcontracting $20.00 $ per unit ($120 less $100 material cost)

Hiring and training cost $200.00 $ per worker

Layoff cost $250.00 $ per worker

Labor hours required per unit 5.0 per unit

Regular Time labor cost $4.00 $ per hour

Overtime cost $6.00 $ per hour

Regular Hours/day 8 per day

(1) Aggregate Production Planning Requirements

January February March April May June

Beginning Inventory 400 450 375 275 225 275

Demand Forecast 1,800 1,500 1,100 900 1,100 1,600

Safety Stock (.25 x Demand Forecast) 450 375 275 225 275 400

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Ending Inventory 450 375 275 225 275 400

(2) Costs of various Production Plans

 Production Plan 1: Exact monthly Production; Vary Workforce

January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Production Hours Required 9,250 7,125 5,000 4,250 5,750 8,625

Working Days per Month 22 19 21 21 22 20

Hours per Month per Worker 176 152 168 168 176 160

Workers Required 53 47 30 26 33 54

New Workers Hired 0 0 0 0 7 21

Hiring Cost $0 $0 $0 $0 $1,400 $4,200 $5,600

Workers Laid Off 0 6 17 4 0 0

Layoff Cost (Workers Laid Off x $250) $0 $1,500 $4,250 $1,000 $0 $0 $6,750

Regular Time Cost $37,312 $28,576 $20,160 $17,472 $23,232 $34,560 $161,312

Inventory 16 19 27 51 63 66

Inventory Cost 23.4 29.1 41.1 76.5 93.9 98.4 $362

Total Cost 174,024

Production Plan 2: Constant Workforce; Vary Inventory and Stockout

January February March April May June Total

Working Days per Month 22 19 21 21 22 20

Production Hours Available (Working Days per
7040 6080 6720 6720 7040 6400
Month x 8 Hr./Day x 40 Workers)*
Actual Production (Production Hours Available/5
1408 1216 1344 1344 1408 1280
Hr./Unit)
Cumulative production 1408 2624 3968 5312 6720 8000

Production requirement 1850 1425 1000 850 1150 1725

Cumulative requirement 1850 3275 4275 5125 6275 8000

Units Short 442 651 307 0 0 0

Shortage Cost (Units Short x $5) $2,210 $3,255 $1,535 $0 $0 $0 $7,000

Units Excess 0 0 0 187 445 0

Inventory Cost (Units Excess x $1.50) $0 $0 $0 $281 $668 $0 $948

Layoff Cost $3,250 $0 $0 $0 $0 $0 $3,250

Regular Time Cost $28,160 $24,320 $26,880 $26,880 $28,160 $25,600 $160,000

*(Sum of Production Requirement calculated in (1) x 5

hr./unit)/(Sum of Production days Available x 8 hr./day) = 40 Total Cost 171,198
(8,000 x 5)/(125 x 8) = 40
 Production Plan 3: Constant Low Workforce; Subcontract

January February March April May June Total

Production Requirement 1,850 1,425 1,000 850 1,150 1,725

Working Day per Month 22 19 21 21 22 20

No. of workers required to meet the monthly
53 41 29 25 33 50
requirement
Production Hours Available (Working Day x 8
4,400 3,800 4,200 4,200 4,400 4,000
Hrs./Day x 25 Workers)*
Actual Production (Production Hours Available/5
880 760 840 840 880 800
hr.per Unit)
Units Subcontracted (Production Requirement -
970 665 160 10 270 925
Actual Production)
Subcontracting Cost (Units Subcontracted x $20) $19,400 $13,300 $3,200 $200 $5,400 $18,500 $60,000

Layoff Cost $7,000 $0 $0 $0 $0 $0 $7,000

Regular Time Cost $17,600 $15,200 $16,800 $16,800 $17,600 $16,000 $100,000

*Minimum production requirement. In this example,

April is minimum of 850 units. Number of workers 25 Total Cost $167,000
required for April is (850 x 5)/(21 x 8) = 25

(3) Comparison of Plans

Cost Plan 1 Plan 2 Plan 3

Hiring $5,600 $0 $0
Layoff $6,750 $3,250 $7,000

Excess inventory $362 $948 $0

Shortage $0 $7,000 $0

Subconstract $0 $0 $60,000

Overtime $0 $0 $0

Regular time $161,312 $160,000 $100,000

Total $174,024 $171,198 $167,000