Question

A firm has decided to alter its level strategy by using overtime to make up shortages...

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?

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Answer #1

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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