The primary cost associated with the level production strategy when compared to the chase production strategy is the
a.cost of holding inventory
b.cost of hiring and firing workers
c.cost of overtime
d.cost of subcontracting
The correct answer and explanation is :
The correct answer is:
a. cost of holding inventory
Explanation:
The level production strategy and the chase production strategy are two approaches to managing production processes, particularly in how they handle demand fluctuations. Understanding the costs associated with each strategy is crucial for determining their effectiveness and efficiency in different business contexts.
- Level Production Strategy:
- In the level production strategy, a company produces a constant amount of goods over time, regardless of fluctuations in demand. This method relies on producing the same quantity each period, which can lead to excess inventory during periods of low demand and shortages during high demand.
- The key cost associated with this strategy is the cost of holding inventory. Because production remains steady, a company must store any surplus goods produced during low-demand periods until they are needed in the future. This results in increased storage costs, inventory management costs, and the possibility of product obsolescence or spoilage if items cannot be sold in a timely manner. Additionally, there may be costs associated with insurance and security for the stored inventory.
- Chase Production Strategy:
- In contrast, the chase production strategy involves adjusting production rates to match fluctuations in demand. Companies using this strategy produce exactly what is needed to meet current demand, minimizing inventory levels and reducing the cost of holding excess inventory.
- The primary costs in this strategy typically involve hiring and firing workers, as the company must adjust its workforce to match production levels. This can result in costs associated with recruitment, training, and severance. While the chase strategy minimizes inventory-related costs, it incurs higher labor costs as it constantly adjusts the workforce.
- Other Costs:
- Overtime (c) and subcontracting (d) costs are generally more associated with adjustments in production capacity in both strategies but are not the primary cost difference between the level and chase strategies. The chase strategy may incur overtime or subcontracting costs to meet sudden increases in demand, but the level strategy’s key cost remains inventory holding.
Thus, the cost of holding inventory is the primary cost associated with the level production strategy.