Question

Denver Tire Co. would like to develop a level and chase aggregate plan using the following information:

Capacity = 900 tires/mo on regular time;  100 tires/mo on overtime; 150 tires/mo subcontracting.

Beginning Inventory = 0 tires; Planned ending inventory = 100 tires.

Costs = Regular ($40/tire); Overtime ($50/tire); Subcontracting ($70/tire)

Carrying Cost = $2/tire/month;   Backlog cost = $20/tire.

a.  Produce a level plan below that minimizes total costs.   

Month	Mar	Apr	May
Demand	800	1300	800

Total Cost of Level Plan =

b. Produce a chase plan below that minimizes total costs.   

Month	Mar	Apr	May
Demand	800	1300	800

Total cost of chase plan =

c.  Which plan would you recommend the company adopt?  Include more than total cost differences in your answer.

Answer 1

a) Level production per month = (800+1300+800+100) /3 = 1000

Where, 100 = Planned ending inventory.

Chase production

C) I would recommend "Chase strategy" for following reasons:

• Low cost, the overall plan has a lower cost than Level plan
• In the level plan, there are huge inventories and any fluctuation in demand can cause a loss due to inventory. This is avoided in Chase plan where there is zero or minimum planned inventory
• In the level plan, we run over the capacity of regular production in all months. Overtime is required in all months to meet customer demand. Overtime can cause dissatisfaction among staff