The following information relates to a company's aggregate production planning activities: Beginning Workforce = 35 workers
Production per Employee = 1,250 units per quarter
Hiring Cost = $500 per worker
Firing Cost = $1,000 per worker
Inventory Carrying Cost = $20 per unit per quarter
If a chase demand strategy is used then the number of workers hired at the start of quarter 2 is
A)10.
B)20.
C)35.
D)80.

Question

The following information relates to a company's aggregate production planning activities:  Beginning Workforce = 35 workers
Production per Employee = 1,250 units per quarter
Hiring Cost = $500 per worker
Firing Cost = $1,000 per worker
Inventory Carrying Cost = $20 per unit per quarter
If a chase demand strategy is used then the number of workers hired at the start of quarter 2 is
A)10. 
B)20. 
C)35. 
D)80.

Quizplus · Accepted Answer

For a chase demand strategy, the company adjusts its workforce to match the demand. The starting workforce is 35 workers and the production per employee is 1,250 units per quarter, which means the company can produce 43,750 units per quarter (35 x 1,250).

Assuming that the demand for quarter 2 is higher than the production capacity, the company needs to hire additional workers. The hiring cost is $500 per worker, and the firing cost is $1,000 per worker.

To calculate the optimal number of workers to hire, we need to consider the cost of hiring and firing workers versus the cost of carrying inventory. Let's assume that the demand for quarter 2 is 50,000 units.

If the company hires 20 additional workers, it can produce 50,000 units in quarter 2 (35 + 20 = 55 workers x 1,250 units per worker). The hiring cost is 20 x $500 = $10,000.

If the company carries inventory to meet the demand, it needs to produce 50,000 units in quarter 1 and store the excess inventory. The inventory carrying cost is $20 per unit per quarter, so the total cost of carrying 50,000 units for one quarter is 50,000 x $20 = $1,000,000.

If the company fires workers after quarter 2, it incurs a cost of 20 x $1,000 = $20,000.

Therefore, the total cost of hiring 20 workers and firing them after quarter 2 is $10,000 + $20,000 + $1,000,000 = $1,030,000.

If the company hires fewer than 20 workers, it will need to carry more inventory, which will increase the carrying cost. If it hires more than 20 workers, the hiring cost and firing cost will increase. Therefore, hiring 20 workers is the optimal choice.

The Following Information Relates to a Company's Aggregate Production Planning