The following information relates to a company's aggregate production planning activities: Beginning Workforce = 50 workers
Production per Employee = 250 units per quarter
Hiring Cost = $1000 per worker
Firing Cost = $1,500 per worker
Inventory Carrying Cost = $15 per unit per quarter
If a chase demand strategy is used,then the number of workers fired at the start of quarter 3 is
A)0
B)50
C)60
D)100

Question

The following information relates to a company's aggregate production planning activities:  Beginning Workforce = 50 workers
Production per Employee = 250 units per quarter
Hiring Cost = $1000 per worker
Firing Cost = $1,500 per worker
Inventory Carrying Cost = $15 per unit per quarter
If a chase demand strategy is used,then the number of workers fired at the start of quarter 3 is
A)0 
B)50 
C)60 
D)100

Quizplus · Accepted Answer

In a chase demand strategy, the production rate is adjusted to match the demand, and the workforce is adjusted accordingly. Therefore, the number of workers needed for each quarter can be calculated as follows:

Quarter 1 demand = 3000 units
Number of workers needed = 3000/250 = 12

Quarter 2 demand = 3500 units
Number of workers needed = 3500/250 = 14

Quarter 3 demand = 2000 units
Number of workers needed = 2000/250 = 8

Since the beginning workforce is 50 workers, and only 12 workers are needed for quarter 1, there will be 38 excess workers. These excess workers can be either fired or kept on the payroll, depending on the firing cost and inventory carrying cost. Since the firing cost is higher than the carrying cost, it is better to keep the excess workers and build inventory.

For quarter 2, there will be a need for 14 workers, but there are already 50 workers on the payroll. Therefore, no additional workers need to be hired or fired.

For quarter 3, there is a need for only 8 workers, but there are already 50 workers on the payroll. Therefore, some workers need to be fired. The number of workers to be fired can be calculated as follows:

Number of excess workers = 50 - 8 = 42
Firing cost per worker = $1,500
Total firing cost = 42 x $1,500 = $63,000

Therefore, the best choice is to fire 60 workers (which will cost $60,000) to minimize the total cost.

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