EBK OM
6th Edition
ISBN: 9781305888210
Author: Collier
Publisher: YUZU
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Chapter 13, Problem 5PA
Summary Introduction
Interpretation:
Costs of level and chase demand production plans.
Concept Introduction:
Chase strategy is a strategy used by company to meet uncertain demands of customers. Company produces so much goods that there is enough inventory for end users. This strategy is used usually by companies to optimally reduce cost of inventory.
Expert Solution & Answer
Answer to Problem 5PA
The total cost using chase strategy is $546,240.
Explanation of Solution
Given information:
| Month | J | F | M | A | M | J | J | A | S | O | N | D |
| Litres (1000s) | 200 | 120 | 75 | 40 | 15 | 7 | 5 | 10 | 30 | 70 | 120 | 130 |
Following is the step wise calculation of level strategy (Note − units in 1,000 liters)
Following is the calculation of holding inventory Holding inventory = Normal Production + On-hand inventory − Demand
Holding inventory = 100 + 90 − 200
Holding inventory / Shortage = 10
The holding inventory / shortage is 10 units
Following is the calculation of Normal Production cost Normal Production cost = Normal production
Normal Production cost = 90
Normal Production cost = $36,000
Following is the holding cost Holding cost = Holding inventory
Holding cost = 15
Holding cost = $450
Following is the total cost Total cost = Normal production cost + Holding inventory cost
Total cost = 36000 + 450
Total cost = $36,450
Following is the calculation of level strategy
| J | F | M | A | M | J | J | A | S | O | N | D | |
| Demand | 200 | 120 | 75 | 40 | 15 | 7 | 5 | 10 | 30 | 70 | 120 | 130 |
| On-handDelivery | 100 | 0 | 0 | 11 | 65 | 140 | 223 | 308 | 388 | 448 | 468 | 438 |
| Normal production | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 |
| Holding inventory | 15 | 65 | 140 | 223 | 308 | 188 | 448 | 408 | 438 | 348 | ||
| Units shortage | 10 | 30 | ||||||||||
| Level strategy cost | ||||||||||||
| Normalproduction | 36,000 | 36,000 | 34,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 |
| Holding cost | 0 | 0 | 450 | 1950 | 4,200 | 6090 | 9240 | 11640 | 13,440 | 14040 | 13140 | 10440 |
| Total cost | 36,000 | 36,000 | 34,450 | 37,950 | 40,200 | 42,090 | 41,240 | 47,640 | 49,440 | 50,040 | 49140 | 46,440 |
| I | F | M | A | M | I | J | A | S | O | N | D | |
| Demand | 200 | 120 | 75 | 40 | 15 | 7 | 5 | 10 | 30 | 70 | 120 | 130 |
| On-handDelivery | 100 | 0 | 0 | 11 | 65 | 140 | 223 | 308 | 388 | 448 | 468 | 438 |
| Normal production | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 | 90 |
| Holding inventory | 15 | 65 | 140 | 223 | 308 | 188 | 448 | 408 | 438 | 348 | ||
| Units shortage | 10 | 30 | ||||||||||
| Level strategy cost | ||||||||||||
| Normalproduction | 36,000 | 36,000 | 34,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 | 36,000 |
| Holding cost | 0 | 0 | 450 | 1950 | 4,200 | 6090 | 9240 | 11640 | 13,440 | 14040 | 13140 | 10440 |
| Total cost | 36,000 | 36,000 | 34,450 | 37,950 | 40,200 | 42,090 | 41,240 | 47,640 | 49,440 | 50,040 | 49140 | 46,440 |
Total cost 517,230The total cost using level strategy is $517,230 Following is the step wise calculation of chase strategy
(Note − units in 1,000 liters)
Following is the Overtime cost
Overtime cost = Normal production cost + Normal production cost
Overtime cost = 400 + 400
Overtime cost = 400 + 80
Overtime cost = $480
Following is the Undertime cost
Undertime cost = Normal production cost + Normal production cost
Undertime cost = 400 + 400
Undertime cost = 400 + 48
Undertime cost = $448
Following is the calculation of chase strategy
Chase Strategy
| I | F | M | A | M | I | J | A | S | O | N | D | |
| Demand | 200 | 120 | 75 | 40 | 15 | 7 | 5 | 10 | 30 | 70 | 120 | 180 |
| On-handDelivery | 100 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | - |
| Normal production | 90 | 90 | 75 | 40 | 915 | 7 | 5 | 10 | 30 | 70 | 90 | 90 |
| Holding inventory | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | - | - | ||
| Units shortage | 10 | 30 | 30 | 90 | ||||||||
| Chase strategy cost | ||||||||||||
| Normalproduction | 36,000 | 36,000 | 30,000 | 16,000 | 6,000 | 2,800 | 2,000 | 4,000 | 12,000 | 28,000 | 36,000 | 36,000 |
| Holding cost | 4,800 | 14,400 | 7,200 | 24,000 | 36,000 | 39,840 | 40,800 | 38,400 | 28,800 | 9,600 | 14,400 | 41,200 |
| Total cost | 40,800 | 50,400 | 37,200 | 40,000 | 42,000 | 42,680 | 42,800 | 42,400 | 40,800 | 37,600 | 50,400 | 79,200 |
Chase strategy
| I | F | M | A | M | I | J | A | S | O | N | D | |
| Demand | 200 | 120 | 75 | 40 | 15 | 7 | 5 | 10 | 30 | 70 | 120 | 180 |
| On-handDelivery | 100 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | - |
| Normal production | 90 | 90 | 75 | 40 | 915 | 7 | 5 | 10 | 30 | 70 | 90 | 90 |
| Holding inventory | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | - | - | ||
| Units shortage | 10 | 30 | 30 | 90 | ||||||||
| Chase strategy cost | ||||||||||||
| Normalproduction | 36,000 | 36,000 | 30,000 | 16,000 | 6,000 | 2,800 | 2,000 | 4,000 | 12,000 | 28,000 | 36,000 | 36,000 |
| Holding cost | 4,800 | 14,400 | 7,200 | 24,000 | 36,000 | 39,840 | 40,800 | 38,400 | 28,800 | 9,600 | 14,400 | 41,200 |
| Total cost | 40,800 | 50,400 | 37,200 | 40,000 | 42,000 | 42,680 | 42,800 | 42,400 | 40,800 | 37,600 | 50,400 | 79,200 |
Total cost = 5,46,240
The total cost using chase strategy is $546,240.
It is recommended for the company to use level strategy as its cost are less compared to chase strategy.
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