COST ANALYSIS

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Level Strategy versus chase strategy

The costs associated with the level strategy include the production of the required number of units, the payments to employees, costs of inventories, costs for materials, cost associated with overtimes

The costs can be broken down as shown below;

  1. The costs of producing the normal 500 units in one month.

500*30=1500

=Total normal production in 12 months

=Costs of generating in one month* 12 months

=1500*12=18000

  1. The costs associated with carrying an inventory over normal production.

Chase strategy

Chase strategy refers to a production strategy which leads to production of as much as needed production. In chase strategy, there is zero inventory, no holding cost, and no shortages. It is quite difficult to achieve a zero inventory because work hours are not necessarily flexible. In the chase strategy, there is low inventory costs which is accompanied by high smoothing

 

MonthF-castStart stockNet ProductionInventory cost (

Inventory*

50/12)

Workers hiredCost of workers (

Workers*

Cost of each

Worker)

Actual OutputEnding Output
January60020070083355000500100
February7001007004161010,0006000
March800080001515,0008000
April700070001010,0007000
May60006000550006000
June50005000005000
July60006000550006000
August700070001010,0007000
September800080001515,0008000
October900090002020,0009000
November700070001010,0007000
December60006000550006000

The problem computation:

Workers required in January=The extra production required / the number of units each added employee can produce per month. (The result should be rounded up since human beings have to be treated as integers)

= (600-500)/20= 5. Therefore, the number of workers required in Jan =5

No of workers to be added in February= (700-500)/20= 10

No of workers added in March= (800-500)/20=15

No of workers added in April = (700-500)/20=10

No of workers added in May= (600-500)/20= 5

No of workers added in June= (500-500)/20=0

No of workers added in July= (600-500)/20= 5

No of workers added in August = (700-500)/20= 10

No of workers in September= (800-500)/20=15

No of workers in October= (900-500)/20=20

No of workers added in November= (700-500)/20=10

No of workers added in December= (600-500)/20=5

The total cost for the chase strategy would then be (total costs of inventories+ costs of salaries charge due to charge in production)

=(110,000+1249)=11,1249

Level Strategy

Level strategy is used in production for a constant amount each and every time. The production has a stable workforce and has no subcontracting.

MonthF-castStart stockNet ProductionInventory cost (

Inventory*

50/12)

Actual OutputEnding Output
January600200700833500100
February7001007004166000
March800080008000
April700070007000
May600060006000
June500050005000
July600060006000
August700070007000
September800080008000
October900090009000
November700070007000
December600060006000

The production strategy would cost the company no additional costs.

The production method suitable for the two companies would be the level strategy because it is cheaper compared to the chase strategy.

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