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

Under a chase demand strategy, the company adjusts its workforce level in line with changes in demand, meaning that it adjusts employment levels and production levels to meet demand while keeping inventory levels low.

To determine how many workers to hire or fire, we need to first calculate the production requirements for each quarter:

Quarter 1 production requirement = 50 x 250 = 12,500 units
Quarter 2 production requirement = 20,000 units
Quarter 3 production requirement = 10,000 units (due to the high inventory carried over from Q2)
Quarter 4 production requirement = 20,000 units

To meet the production requirements for Quarter 3, the company needs to decrease its workforce by 10 workers, since each worker produces 250 units per quarter:

12,500 + 20,000 - (60 x 250) = 10,000

The cost of firing 10 workers would be:

10 x $1,500 = $15,000

This cost is lower than the cost of carrying excess inventory:

10,000 x $15 = $150,000

Therefore, the best choice is to fire 10 workers at the start of Quarter 3.

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