Assignment Chapter 6

Q16.1)

From eq 16.19:

We get cost for size or capacity difference:

C₁=C_o (L₁/L₀) ^x=C_o (1000/100)^0.61

In 1985, for purchasing 10 new units, it will not cost 10 times more due to the economy scale but if purchasing for 22years later, the cost will increase due to the inflation.

Inflation per year = 5%

Original cost = $35,000

New original cost due to the inflation for 22 years later = 35,000 (1+0.05)22= $102,384

So, the estimate of the cost is:

C1 = 102,384 (1000/100)0.61 = $ 417,092

Q16.2)

Overseas subcontractor

Labor per shoe                                                            2.75

Materials                                                         9.00

Shipping and import duty                               3.50

Operating cost                                                 3.00

Profit                                                               1.75

U.S brand name shoe company

Purchase from subcontractor                          20.00

Research and development                             0.25

Promotion and advertising                              4.00

Sales, G&A                                                     5.00

Profit                                                               6.75    

Q16.3)

At break-even point, Q_B, cost using hard tooling = cost of using soft tooling.         

The chief cost elements are:

·         Cost of tooling, CH = $7500 and CS = $600

·         Cost of tool setup, SH= $60 and SC = $100. Parts made in batches, b, of 500 units.

·         Cost of making one part, CpH = $0.80 and CpS = $3.40

So, at break-even point

C_H+ (Q_B/b) S_H + C_pH Q_B = C_S + (Q_B/b) S_S + C_pS Q_B

Q_B = (C_H-C_S) / (((S_S-S_H)/b) + (C_pS - C_pH)) = (7500-600)/ ((100-60)/500) + (3.4-0.80))=6900/2.68 = 2574

At break-even point, hard tooling approaches become more effective than soft tooling. So, for 500 units, the best decision is to use hard tooling.

Q16.4

Prime cost

Direct labor                                                                 950,000

Direct material                                                                        2,150,000

Direct expenses                                                                       60,000

Direct engineering                                                       90,000

Direct engineering expenses                                       30,000

                                                                                    3,280,000                                (1)

Factory expense

Plant utilities                                                               70,000

Plant & equipment depreciation                                             120,000

Warehouse expense                                                     60,000

                                                                                    300,000                                   (2)

General and administrative expenses (G&A)            

Plant manager and staff                                                          180,000

Administrative salaries                                                            120,000

Office utilities                                                             10,000

                                                                                    310,000                                   (3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000                   (4)

Sales expense = 100,000                                             (5)

Total cost = (4)+ (5) =3,990,000                                             (6)

Profit margin = profit / sales = P/S = 0.15

Sales (S) = Total cost (C_T) + Profit (P)

S =C_T + P = C_T + 0.15S ;

S = C_T / 0.85 = 3,990,000/0.85 = 4,694,118

The unit selling price of turbine is $4,694,116/60 units sold = $ 78,235