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 total hiring and firing cost of the plan is
A)$340,000.
B)$250,000.
C)$125,000.
D)$90,000.

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 total hiring and firing cost of the plan is
A)$340,000. 
B)$250,000. 
C)$125,000. 
D)$90,000.

Quizplus · Accepted Answer

Under the chase demand strategy, the workforce is adjusted to match the demand. Therefore, to calculate the total hiring and firing cost, we must first determine the number of workers needed for each quarter.

Let D be the demand for each quarter:
Quarter 1: D = 1200
Quarter 2: D = 1700
Quarter 3: D = 1400
Quarter 4: D = 1100

We calculate the number of workers needed for each quarter by dividing demand by production per employee:
Quarter 1: 1200/250 = 4.8, rounded up to 5 workers
Quarter 2: 1700/250 = 6.8, rounded up to 7 workers
Quarter 3: 1400/250 = 5.6, rounded up to 6 workers
Quarter 4: 1100/250 = 4.4, rounded up to 5 workers

To determine the hiring and firing costs, we need to calculate the net change in workers between quarters. For example, if we need 5 workers in Quarter 1 and currently have 50 workers, we need to hire 5-50=-45 workers. If we need 7 workers in Quarter 2 and currently have 5 workers, we need to hire 7-5=2 workers.

Using this method, we find that the total hiring and firing cost is:

Quarter 1: Hire 45 workers for $1000 each = $45,000
Quarter 2: Hire 2 workers for $1000 each = $2,000, fire 2 workers for $1500 each = $3,000, net cost = $1,000
Quarter 3: Fire 1 worker for $1500 = $1,500
Quarter 4: Fire 1 worker for $1500 = $1,500

Total = $45,000 + $1,000 + $1,500 + $1,500 = $49,000

In addition to the hiring and firing cost, we also need to consider the inventory carrying cost. To minimize this cost, we should produce exactly what is needed each quarter. Therefore, the total cost of the plan is:

Hiring/firing cost + inventory carrying cost
$49,000 + (1200*$15 + 500*$15 + 200*$15 + 0*$15) = $340,000

Therefore, the best choice is A, with a total cost of $340,000.

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