Dilla University College of Business and economics Department of Logistics and Transport

Management Operations Management worksheet on chapter four

Q1. XYZ Company has the following aggregate demand and cost information for the upcoming four
quarters.

Quarter Demand Previous quarter's output ………1300 units

1 ……. 1400 Beginning inventory ………… 0 units
2 ……. 1200 Stock out cost (backorder) …… birr 50 per unit
3 ……. 1600 Inventory holding cost……… birr 10 per unit at end
4 ……. 1500 of quarter
Hiring workers.………….…. .birr 40 per unit
Firing workers………….…… birr 80 per unit
Subcontracting cost………….birr 60 per unit
Unit cost (regular) …………..birr 30 per unit
Overtime………….…………. birr 10 extra per unit

Which of the following production plans is better?

1. Plan A—Chase demand by hiring and firing
2. Plan B— level strategy - steady rate of regular time output which is equal to the
average demand while using inventory , back ordering etc to meet uneven demand.
Note that the regular work force will be adjusted at the beginning of the first
quarter.
3. Plan C—1350 units level - using inventory and subcontracting to meet uneven
demand. Note that the regular work force will be adjusted at the beginning of the
first quarter.

Solution
1. Plan A—Chase demand by hiring and firing
 Note that in chase demand strategy capacity (production) in each time period
is varied to exactly match the forecasted aggregate demand in that time period.

Quarter Demand Capacity Production hiring cost Firing costs Total cost
(Production) cost (cost of (cost of
increasing decreasing
production) Production)

1 1400 1400 42,000 4000 46,000

(1400x30) *(100x40)
2 1200 1200 36,000 - 16,000 52,000
(1200x30) ** (200 x 80)
3 1600 1600 48,000 16,000 64,000
(1600x30) (400 x 40)
4 1500 1500 45,000 - 8,000 53,000
(1500x30) (100 x 80)
Total costs 171,000 20,000 24,000 215,000
 Dilla University College of Business and economics Department of Logistics and Transport
Management Operations Management worksheet on chapter four

Note
- * (100 x 40) = production output Quarter 1 =1,400 units

Previous quarter’s output = 1,300 units

Production increase Q1 = 100 units
Cost of hiring additional workers for the increase in production = birr 40 per unit
Cost of production increase (hiring cost) = 100 x 40 = 4,000
- ** (200 x 80) = production output Quarter 2 =1,200 units

Production output Quarter 1 = 1,400 units

Production decrease Q2 = 200 units
Cost of firing workers for the decrease in production = birr 80 per unit
Cost of production decrease (firing cost) = 200 x 80 = 16,000

2. Plan B— level strategy

- steady rate of regular time output which is equal to the average demand while using
inventory, back ordering etc to meet uneven demand
- Note that the regular work force will be adjusted at the beginning of the first quarter.

Quarter Capacity Demand Quarterly Ending

(production ) inventory change inventory

1. 1425 1400 +25 25

2. 1425 1200 +225 250
3. 1425 1600 -175 75
4. 1425 1500 -75 0
Total 5700 5700 - 350

Total expected demand 5700

Average demand ¿ 1425
production period 4

Description
cost

Inventory holding cost 3,500 (= 350 x 10)

Production cost 171,000 (= 5700 x 30)

cost of increasing production during Quarter 5,000 *(=125x 40)

1

Total cost 179.500

 Dilla University College of Business and economics Department of Logistics and Transport
Management Operations Management worksheet on chapter four

Note
- *(125x 40) = production output Quarter 1 =1,425 units
Previous quarter’s output = 1,300 units
Production increase Q1 = 125 units
Cost of hiring additional workers for the increase in production level = birr 40 per unit
Cost of production increase (hiring cost) = 125 x 40 = 5,000

3. Plan C—1350 units level - using inventory and subcontracting to meet uneven
demand
- Note that the regular work force will be adjusted at the beginning of the first quarter.

Quarter Capacity Demand Ending Subcontracting

(production ) inventory

1. 1350 1400 - 50
2. 1350 1200 150 -
3. 1350 1600 - 100
4. 1350 1500 - 150
Total 5400 5700 150 300

Description cost

Production cost 162,000 (= 5400 x 30)

Inventory holding cost 1,500 (= 150 x 10)

Subcontracting cost 18,000 (= 300 x 60)

cost of increasing production during Quarter 1 2,000 *(=50 x 40)

Total cost 183.500

Note: - *(50x 40) = production output Quarter 1 = 1,350 units

Previous quarter’s output = 1,300 units
Production increase Q1 = 50 units
Cost of hiring additional workers for the increase in production level = birr 40 per unit
Cost of production increase (hiring cost) = 50 x 40 = 2,000

Therefor; Plan B is the better (lowest cost) plan

 Plan-A costs birr 215,000

 Dilla University College of Business and economics Department of Logistics and Transport
Management Operations Management worksheet on chapter four

 Plan-B costs birr 179,500

 Plan-C costs birr 183,500

Q2. The MPS calls for 110 units of Product M. There are currently 30 of Product M on hand.
Each M requires 4 of Component N. There are 20 units of N on hand. Determine the
following
A. Net requirements for M
B. Gross requirements for N
C. Net requirements for N.
Solution

Gross requirement for product M = 110 Each product M requires 4 component N

Minus inventory on hand product M = - 30 → Gross requirement for component N = 80 X
Net requirement for product M = 80 4 = 320
Minus inventory on hand product N = -20
Net requirement for component N = 300

Q3. Consider the following bill of material.

A. Determine the quantities of B, C, D, E, F, and G needed to assemble one A.

B. Determine the quantities of these components that will be required to assemble 40
units of A, assuming no inventories on hand for A and its components parts
C. Determine the quantities of these components that will be required to assemble 40
units of A, taking into account the following quantities on hand (i.e., in inventory) of
various components:
B = 10
C = 20
D = 10
 Dilla University College of Business and economics Department of Logistics and Transport
Management Operations Management worksheet on chapter four

E = 40
F=0
G = 30

Solution
A. Determine the quantities of B, C, D, E, F, and G needed to assemble one A.
Part B: 2 x number of As = 2 x1 = 2
Part C: 3 x number of As = 3 x 1 = 3
Part D: 1 x number of As = 1x 1 = 1
Part E: (1 x number of Bs) + (2 x number of Ds) = (1x2) + (2x 1) = 4
Part F: 1 x number of Cs = (1 x 3 ) = 3
Part G: (1 x number of Cs) + (1 x number of Ds) = (1 x 3) + (1 x 1) = 4
B. Determine the quantities of these components that will be required to assemble 40
units of A, assuming no inventories on hand for A and its components parts

Part B: 2 x number of As = 2 x40 = 80

Part C: 3 x number of As = 3 x 40 = 120
Part D:1 x number of As = 1x 40 = 40
Part E: (1 x number of Bs) + (2 x number of Ds) = (1x80) + (2x 40) = 160
Part F: 1 x number of Cs = (1 x 120 ) = 120
Part G:(1 x number of Cs) + (1 x number of Ds) = (1 x 120) + (1 x 40) = 160

C. Determine the quantities of these components that will be required to assemble 40

units of A, taking into account the following quantities on hand (i.e., in inventory) of
various components:
B = 10
C = 20
D = 10
E = 40
F=0
G = 30
Part B: 2 x number of As = 2 x40 = 80 – 10 (inventory)= 70
Part C: 3 x number of As = 3 x 40 = 120 – 20 (inventory) = 100
Part D:1 x number of As = 1x 40 = 40 – 10 (inventory) = 30
Part E: (1 x number of Bs) + (2 x number of Ds)
= (1x70) + (2x 30) = 130 – 40 (inventory) = 90
Part F: 1 x number of Cs = (1 x 100 ) = 100 – 0 (inventory) = 100
Part G:(1 x number of Cs) + (1 x number of Ds)
= (1 x 100) + (1 x 30) = 130 – 30 (inventory) = 100