The SOP team at Kansas Furniture has received estimates of d

The S&OP; team at Kansas Furniture, has received estimates of demand requirements as shown in the table. Assuming one-time stockout costs for sales of $100 per unit, inventory carrying costs of $25 per unit per month, and zero beginning and ending inventory, evaluate the following plan on of incremental cost basis: Plan A: Produce at a steady rate (equal to minimum requirements) of 1.200 units per month and subcontract additional units at a $60 per unit premium cost. Subcontracting capacity is limited to 500 units per month (Enter all responses as whole numbers).

Solution

In the above table, the regular production for month of july is 1200 units and the demand is 1200 units, hence,There is no requirement to produce extra units of furniture. becouse (demand units=production units).In July the subcontract cost is nil, there is a 0 shortfall.

Subcontract cost =0 * 60 =$0 month July

Now month of August, regular production is 1200units and the demond is 1300 units, hence S&OP team need to produce 100 units more and there is a short fall of 100 units of furniture.

Calculate subcontract cost by multiplying the shortfall 100 units by the subcontract cost of $60 per unit

Subcontract cost =100 * 60 =$6000   

Similarly September, Subcontract cost = 0*60 =$ 0

October, Subcontract cost = 500 * 60 =$ 30,000

November, Subcontract cost =450* 60 =$ 27,000

December, Subcontract Cost = 200 * 60 = $ 12,000

Total Cost =$ (0+6000 + 0 + 30,000 +27,000+12,000) =$ 75,000

The cost of Plan A is $ 75,000