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

January 1,200 May 2,300
February 1,600 June 2,100
March 1,800 July 1,800
April 1,800 August 1,300

Her operations manager is considering a new plan, which begins in January with 200 units on hand and ends with zero inventory. Stockout cost of lost sales is $125 per unit. Inventory holding cost is $20 per unit per month.

Ignore any idle time costs. The plan is called plan B.

Rate of 1,200 units per month, which will meet minimum demands. Then use sub contracting, with additional units at a premium price of $80 per unit. Plan B sub contracting capacity is limited to 1,100 units per month.


Evaluate this plan by computing the costs for January through August.

In order to arrive at the costs, first compute the ending inventory and sub contracting units for each month by filling in the table below:

(Round to whole numbers)

Period Month Demand Production Ending Inventory Sub contract Units
0 December 1,200 1,200
1 January 1,200 1,200
2 February 1,600 1,200
3 March 1,800 1,200
4 April 1,800 1,200
5 May 2,300 1,200
6 June 2,100 1,200
7 July 1,800 1,200
8 August 1,300 1,200

A) What is the Total subcontracting cost?

B) What is the Total inventory carrying cost?

C) What is the Total cost, excluding normal time labor costs?

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