A firm has decided to alter its level strategy by using overtime to make up shortages in production. For a given planning period, the beginning inventory is 500, straight time production capacity is 3000 units, demand is 4000 units, and each unit requires 5 hours of labor.
a. If your overtime rate is $50/hour, what is the overtime cost to produce all the required units?
b. If your total overtime capacity is limited to 1500 hours, what is the beginning inventory for the following period?
Ans:
Explanation:
a) Straight time production capacity = 3000 units
Demand = 4000 units
Overtime production = Demand - straight time production capacity - beginning inventory
Overtime production = 4000 - 3000 - 500
Overtime production = 500 units
Overtime production hours = Overtime production * labor hours per unit
Overtime production hours = 500 * 5
Overtime production hours = 2500 hours
Overtime cost = Overtime production hours * Overtime cost per hour
Overtime cost = 2500 * 50
Overtime cost = $125,000
b) Overtime capacity = 1500 hours
Overtime production = Overtime capacity / labor hours per unit
Overtime production = 1500 / 5
Overtime production = 300 units
Total Units available = Overtime production + straight time production capacity + beginning inventory
Total Units available = 300 + 3000 + 500
Total Units available = 3800
Demand = 4000 units
Demand > Total units available
Hence,
Backlog = Demand - Total units available
Backlog = 4000 - 3800
Backlog = 200 units
Inventory for the following period = - 200 units
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