Sample problem for Aggregate Production Planning

A firm is planning next year’s production and wishes to develop a production plan for the next six months. The firm
currently employs 53 workers and operates one shift of eight hours duration. You are provided with the following
information:

Month Demand Forecast No. of Working Days

Jan 1800 22
Feb 1500 19
Mar 1100 21
Apr 900 21
May 1100 22
June 1600 20
Total 8000 125

Cost

Materials $100/unit
Inventory Holding Costs $1.50/unit/month
Marginal Cost of Subcontract $20/unit ($120 subcontracting cost less $100 material savings)
Marginal Cost of stock-out $5/unit/month

Hiring and training cost $200/worker

Layoff cost $250/worker

Labor hours required 5/unit

Labor Cost:
Regular time (8 Hrs/day) $4/hour
Overtime $6/hour

Inventory Information

Beginning Inventory 400 units

Safety stock 25% of monthly demand
We would like you to develop alternative production plans for this firm. Investigate the following three different plans and
identify the plan with the least cost.

Plan 1: Produce to exact monthly production requirements using a regular eight hour day by varying workforce

Plan 2: Maintain a constant workforce level required to meet the average monthly requirement