Chapter 13 problems 13.

3:

The president of Hill Enterprises, Terri Hill, projects the firm’s aggregate demand
requirements over the next 8 months as follows:

Her operations manager is considering a new plan, which begins in January with 200 units on
hand. Stockout cost of lost sales is $100 per unit. Inventory holding cost is $20 per unit per
month. Ignore any idle-time costs. The plan is called plan A.

Plan A: Vary the workforce level to execute a “chase” strategy by producing the quantity
demanded in the prior month. The December demand and rate of production are both 1,600
units per month. The cost of hiring additional workers is $5,000 per 100 units. The cost of
laying off workers is $7,500 per 100 units. Evaluate this plan.

Ans:

Stock on Hand 200 unit

Month Demand Production Hire Layoff Cost

Dec 1600
Jan 1400 1200 400 $30,000
Feb 1600 1600 400 $20,000
Mar 1800 1800 200 $10,000
Apr 1800 1800 $0
May 2200 2200 400 $20,000
Jun 2200 2200 $0
Jul 1800 1800 400 $30,000
Aug 1400 1400 400 $30,000
$140,000

Total cost for the plan ‘A’ works out to be $140,000.

Chapter 13 problems 13.5:

Hill is now considering plan C. Beginning inventory, stockout costs, and holding costs are
provided in Problem 13.3:

a) Plan C: Keep a stable workforce by maintaining a constant production rate equal to the
average requirements and allow varying inventory levels.
Ans:

The average requirement is found by summing the total demand from January through
August, and dividing the result by 8 months to find 1,775 units per month.

Month Demand Production Ending Inv. Stock-out Cost

Dec 200
Jan 1400 1775 575 $11,500
Feb 1600 1775 750 $15,000
Mar 1800 1775 725 $14,500
Apr 1800 1775 700 $14,000
May 2200 1775 275 $5,500
Jun 2200 1775 0 150 $15,000
Jul 1800 1775 0 25 $2,500
Aug 1400 1775 375 $7,500
$85,500

Total cost for the plan is $85,500. We would recommend plan C over plan A.

b) Plot the demand with a graph that also shows average requirements. Conduct your analysis
for January through August.
 Demand
Chart
Average
Requirement

We we can see that the demand from January till February is below the average requirement
and then from March till July the demand is above the the average requirement and then in
the month of August, the demand goes below the average requirement.

Chapter 13 problems 13.9:

Mary Rhodes, operations manager at Kansas Furniture, has received the following estimates
of demand requirements:

July Aug. Sept. Oct. Nov. Dec.

1,000 1,200 1,400 1,800 1,800 1,600

a) Assuming stockout costs for lost sales of $100 per unit, inventory carrying costs of $25 per
unit per month, and zero beginning and ending inventory, evaluate these two plans on an
incremental cost basis:

• Plan A: Produce at a steady rate (equal to minimum requirements) of 1,000 units per month
and subcontract additional units at a $60 per unit premium cost.

• Plan B: Vary the workforce, which performs at a current production level of 1,300 units per
month. The cost of hiring additional workers is $3,000 per 100 units produced. The cost of
layoffs is $6,000 per 100 units cut back.
Ans:

Plan A
Sub
Deman Productio End of period Contract Inventor Subcontract
Month d n Inventory Units y Cost Cost
June 1000
July 1000 1000 0 0 0 0
August 1200 1000 0 200 0 12000
Septembe
r 1400 1000 0 400 0 24000
October 1800 1000 0 800 0 48000
November 1800 1000 0 800 0 48000
December 1600 1000 0 600 0 36000
Total Cost $ 168000

Plan B
Hire
Month Demand Production Hire Layof Cost Layof Cost
June 1300
July 1000 1000 0 300 0 18000
August 1200 1200 200 0 6000 0
September 1400 1400 200 0 6000 0
October 1800 1800 400 0 12000 0
November 1800 1800 0 0 0 0
December 1600 1600 0 200 0 12000
Total Cost 24000 30000

Total Cost in Plan B = 30000+24000 = $ 54000

b) Which plan is best and why?

Ans:

Comparing both the plan, we find that Plan B is better.

Chapter 13 problems 13.21:

Forrester and Cohen is a small accounting firm, managed by Joseph Cohen since the
retirement in December of his partner Brad Forrester. Cohen and his 3 CPAs can together bill
640 hours per month. When Cohen or another accountant bills more than 160 hours per
month, he or she gets an additional “overtime” pay of $62.50 for each of the extra hours: This
is above and beyond the $5,000 salary each draws during the month. (Cohen draws the same
base pay as his employees.) Cohen strongly discourages any CPA from working (billing)
more than 240 hours in any given month. The demand for billable hours for the firm over the
next 6 months is estimated below:

Month Estimate of Billable Hours

Jan 600
Feb 500
Mar 1000
Apr 1200
May 650
Jun 590

Cohen has an agreement with Forrester, his former partner, to help out during the busy tax
season, if needed, for an hourly fee of $125. Cohen will not even consider laying off one of
his colleagues in the case of a slow economy. He could, however, hire another CPA at the
same salary, as business dictates.

Refer to the CPA firm in Problem 13.20. In planning for next year, Cohen estimates that
billable hours will increase by 10% in each of the 6 months. He therefore proceeds to hire a
fifth CPA. The same regular time, overtime, and outside consultant (i.e., Forrester) costs still
apply.

a) Develop the new aggregate plan and compute its costs.

Ans:

Cost with the 1st plan of 4 CPA’s and using Forrester as outside consultant (Previous
aggregate plan)

Estimate of
Billable Extra Regular Total
Month Hours Capacity Hours Cost Overtime Forrester Cost
Jan 600 640 -40 20000 0 0 20000
Feb 500 640 -140 20000 0 0 20000
Mar 1000 640 360 20000 20000 5000 45000
Apr 1200 640 560 20000 20000 30000 70000
May 650 640 10 20000 625 0 20625
Jun 590 640 -50 20000 0 0 20000
 Total
Cost 195625

Cost with the 2nd plan of 5 CPA’s and using Forrester as outside consultant with
increased billable hours (New aggregate plan)

Estimate of
Billable Capacit Extra Regular Overtim Forreste Total
Month Hours y Hours Cost e r Cost
Jan 660 800 -140 25000 0 0 25000
Feb 550 800 -250 25000 0 0 25000
Mar 1100 800 300 25000 18750 0 43750
Apr 1320 800 520 25000 25000 15000 65000
May 715 800 -85 25000 0 0 25000
Jun 649 800 -151 25000 0 0 25000
Total
Cost 208750

b) Comment on the staffing level with five accountants. Was it a good decision to hire the
additional accountant?

Ans:

With five accountants, the total cost is higher compared to the 1st plan of 4 CPA’s. So, I don’t
think that it was a good decision to hire the additional accountant.