Answer:
Explanation:
Following demand data is taken form textbook: Donald Bowersox, David Closs, Logistics Management, Tata McGram-Hill Edition 2000, page no. 453
Day Demand
Monday 3,400
Tuesday 3,625
Wednesday 3,205
Thursday 3,380
Friday 3,670
Weekly demand 17,280
A) Compensation plan – Hourly based
Wage rate = $13 per hour
Productivity per worker = 20 units per hour
Working hours = 40 hours per week
Error rate = 0.5%
Revenue lost per occurrence of error = $60
Average requirement of the workers = Weekly demand/(productivity per worker x working hours)
= 17,280 units/(20 units per hour x 40 hours)
= 21.6
Actual requirement of the workers = 22 workers
Labor cost = Number of workers x wage rate per hour x working hours
Labor cost = 22 x $13 x 40 = $11,440
Lost revenue = error rate x weekly demand x revenue lost per occurrence of error
Lost revenue = 0.005 x 17,280 x $60 = $5184
Total cost of hourly compensation plan = $11,440 + $5,184 = $16,624
B) Compensation plan – Performance based
Wage rate per unit = $0.40 per unit
Productivity per worker = 28 units per hour
Working hours = 40 hours per week
Error rate = 1%
Revenue lost per occurrence of error = $60
Average requirement of the workers = Weekly demand/(productivity per worker x working hours)
= 17,280 units/(28 units per hour x 40 hours)
= 15.4
Actual requirement of the workers = 16 workers
Labor cost = Number of workers x wage rate per unit x working hours x productivity per hour
Labor cost = 16 x $0.4 per unit x 40 hours x 28 units per hour = $7168
Lost revenue = error rate x weekly demand x revenue lost per occurrence of error
Lost revenue = 0.01 x 17,280 x $60 = $10,368
Total cost of hourly compensation plan = $7,168 + $10,368 = $17,536
Conclusion
Hourly based plan Performance based plan
Number 22 workers 16 workers
of workers
required
Total cost $16,624 per week $17,536 per week
Thus, compensation plan on hourly based with 22 workers is cost effective than performance based plan.
