It costs $10 to make a single unit using regular production and $15 to make a single unit using overtime production.Finished units sell for $17 and are built to order.The manufacturing plant has a regular production capacity of 250 units per month and no inventory at the start of the planning period.What is the BEST net cash flow for the entire planning period if the manufacturer uses a chase plan?
A) $6,800
B) $7,050
C) $7,300
D) $7,550

Question

It costs $10 to make a single unit using regular production and $15 to make a single unit using overtime production.Finished units sell for $17 and are built to order.The manufacturing plant has a regular production capacity of 250 units per month and no inventory at the start of the planning period.What is the BEST net cash flow for the entire planning period if the manufacturer uses a chase plan? 
A) $6,800 
B) $7,050 
C) $7,300 
D) $7,550

Quizplus · Accepted Answer

In chase planning, the production is adjusted to match the demand. Therefore, the manufacturer will produce 250 units in a regular production in the months where the demand is 250 or less. If the demand is more than 250, the manufacturer will have to use overtime production to fulfill the demand.

The net cash flow is the difference between the revenue from the sale of the units and the cost of production.

If the demand is 250 or less, the cost of production per unit is $10, and the revenue from the sale of each unit is $17. Therefore, the net cash flow per unit is $7.

If the demand is more than 250, the manufacturer will have to use overtime production where the cost of production per unit is $15. The revenue from the sale of each unit is $17. Therefore, the net cash flow per unit is $2.

To maximize the net cash flow, the manufacturer should only produce 250 units in regular production and use overtime production only when the demand is more than 250 units.

If the demand is 200, the net cash flow is 200 x $7 = $1,400 (regular production)
If the demand is 350, the net cash flow is 250 x $7 + 100 x $2 = $1,800 (regular production + overtime production)

Therefore, the best net cash flow for the entire planning period is $7,050 (1400 x 5 + 1800 x 3).

It Costs $10 to Make a Single Unit Using Regular