Consider the estimated aggregate demand for a company's ski product line for the upcoming year in the following table.Calculate the inventory holding costs for the month of March using the level production strategy.Assume the regular time production cost as $200/pair of skis,the average monthly inventory holding cost as $20/pair of skis per month,and the beginning inventory for January is 8,000 units. $$\begin{array} { | c | c | c | c | }
\hline \text { Month } & \begin{array} { c }
\text { Demand } \
\text { (in pairs } \
\text { of unit) }
\end{array} & \text { Month } & \begin{array} { c }
\text { Demand } \
\text { (in pairs } \
\text { of units) }
\end{array} \
\hline \text { J an } & 8,000 & \text { J uly } & 1,000 \
\hline \text { Feb } & 7,000 & \text { Aug } & 1,300 \
\hline \text { Mar } & 5,000 & \text { Sept } & 2,000 \
\hline \text { Apr } & 4,000 & \text { Oct } & 3,000 \
\hline \text { May } & 2,000 & \text { Nov } & 5,700 \
\hline \text { J une } & 2,000 & \text { Dec } & 7,000 \
\hline
\end{array}$$
A)$5,000
B)$7,500
C)$10,000
D)$20,000

Question

Consider the estimated aggregate demand for a company's ski product line for the upcoming year in the following table.Calculate the inventory holding costs for the month of March using the level production strategy.Assume the regular time production cost as $200/pair of skis,the average monthly inventory holding cost as $20/pair of skis per month,and the beginning inventory for January is 8,000 units. $$\begin{array} { | c | c | c | c | } 
\hline \text { Month } & \begin{array} { c } 
\text { Demand } \
\text { (in pairs } \
\text { of unit) }
\end{array} & \text { Month } & \begin{array} { c } 
\text { Demand } \
\text { (in pairs } \
\text { of units) }
\end{array} \
\hline \text { J an } & 8,000 & \text { J uly } & 1,000 \
\hline \text { Feb } & 7,000 & \text { Aug } & 1,300 \
\hline \text { Mar } & 5,000 & \text { Sept } & 2,000 \
\hline \text { Apr } & 4,000 & \text { Oct } & 3,000 \
\hline \text { May } & 2,000 & \text { Nov } & 5,700 \
\hline \text { J une } & 2,000 & \text { Dec } & 7,000 \
\hline
\end{array}$$
A)$5,000
B)$7,500
C)$10,000
D)$20,000

Quizplus · Accepted Answer

To use the level production strategy, we need to calculate the average monthly demand for the entire year.
Average monthly demand = (Total demand for the year) / (Number of months) 
= (8,000 + 7,000 + 5,000 + 4,000 + 2,000 + 2,000 + 1,000 + 1,300 + 2,000 + 3,000 + 5,700 + 7,000) / 12 
= 4,025 pairs of skis per month

Since we are using the level production strategy, we will produce 4,025 pairs of skis every month.

Inventory at the beginning of March = Inventory at the beginning of February + Production in February - Demand in February 
= 8,000 + 4,025 - 7,000 
= 5,025

Inventory holding cost for March = Average monthly inventory holding cost * Inventory for the month 
= $20/pair * 5,025 pairs 
= $100,500

However, we must also note that we are given the regular time production cost as $200/pair of skis, so the total cost of production for March would be: 
Production cost in March = Production in March * Regular time production cost 
= 4,025 pairs * $200/pair 
= $805,000

Thus, the total cost for March would be: 
Total cost for March = Production cost in March + Inventory holding cost for March 
= $805,000 + $100,500 
= $905,500

Therefore, the inventory holding costs for the month of March using the level production strategy is $100,500, which is option (C).

Consider the Estimated Aggregate Demand for a Company's Ski Product