Chapter 7_OQ 15_p 162 – SOP

Order Description
Practice activities for this module are:
1. Actively participate in the discussion forum
2. Ask questions
3. Share your thoughts
4. Analyze
5. Synthesize
6. Review the exercise problem Ch. 7: OQ 15 (p. 162)
7. Watch corresponding video strips in Module 0 if any
8. Watch the YouTube videos if provided
9. Complete your assignments

Chapter 7_OQ 15_Page 162
The Goodparts Company (GC) produces a component that is subsequently used in the aerospace industry.
The component consists of 3 parts (A, B, and C) that are purchased from outside and cost 40, 35, and 15 cents per piece, respectively.
Parts A and B are assembled first on assembly line 1, which produces 140 components per hour. Part C undergoes a drilling operation before being finally assembled with the output from assembly line
1. There are in total 6 drilling machines, but at present only 3 of them are operational. Each drilling machine drills part C at a rate of 50 parts per hour.
In the final assembly, the output form assembly line 1 is assembled with the drilled part C. The final assembly line produces at a rate of 160 components per hour. At present, components are
produced 8 hours a day and 5 days a week. Management believes that if need arises, it can add a second shift of 8 hours for the assembly lines.
The cost of assembly labor is 30 cents per part for each assembly line: the cost of drilling labor is 15 cents per part. For drilling, the cost of electricity is 1 cent per part. The total overhead
cost has been calculated as $1,200 per week. The depreciation cost for equipment has been calculated as $30 per week.
?
a. Draw a process flow diagram and determine the process capacity (i.e., number of components produced per week) of the entire process.
b. Suppose a second shift of 8 hours is run for assembly line 1 and the same is done for the final assembly line. In addition, 4 of the 6 drilling machines are made operational. The drilling
machines, however, operate for just 8 hours a day. What is the new process capacity (i.e., number of components produced per week)? Which of the 3 operations limits the capacity?
c. Management decides to run a second shift of 8 hours for assembly line 1 plus a second shift of only 4 hours for the final assembly line. 5 of the 6 drilling machines operate for 8 hours a day.
What is the new capacity? Which of the 3 operations limits the capacity?
d. Determine the cost per unit output for questions b and c.
e. The product is sold at $4.00 per unit. Assume that the cost of a drilling machine (fixed cost) is$30,000 and the company produces 8,000 units per week. Assume that 4 drilling machines are used
for production. If the company had an option to buy the same part at $3.00 per unit, what would be the break-even number of units?
?
5
a. Draw a process flow diagram and determine the process capacity (i.e., number of components produced per week) of the entire process.
Process Flow Diagram

Capacity of assembly line 1
= 140 units/hour X 8 hours/day X 5 days/week = 5,600 units/week.

Capacity of drill machines
= 3 drill machines X 50 parts/hour X 8 hours/day X 5 days/week = 6,000 units/week.

Capacity of final assembly line
= 160 units/hour X 8 hours/day X 5 days/week = 6,400 units/week.

The capacity of the entire process is 5,600 units per week, with assembly line 1 limiting the overall capacity.
?
b. Suppose a second shift of 8 hours is run for assembly line 1 and the same is done for the final assembly line. In addition, 4 of the 6 drilling machines are made operational. The drilling
machines, however, operate for just 8 hours a day. What is the new process capacity (i.e., number of components produced per week)? Which of the 3 operations limits the capacity?

Capacity of assembly line 1
= 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines
= 4 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week = 8,000 units/week.

Capacity of final assembly line
= 160 units/hour X 16 hours/day X 5 days/week = 12,800 units/week.

The capacity of the entire process is 8,000 units per week, with drilling machines limiting the overall capacity.
?
c. Management decides to run a second shift of 8 hours for assembly line 1 plus a second shift of only 4 hours for the final assembly line. 5 of the 6 drilling machines operate for 8 hours a day.
What is the new capacity? Which of the 3 operations limits the capacity?

Capacity of assembly line 1
= 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines
= 5 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week = 10,000 units/week.

Capacity of final assembly line
= 160 units/hour X 12 hours/day X 5 days/week = 9,600 units/week.

The capacity of the entire process is 9,600 units per week.

The final assembly operation is limiting the overall capacity.
?
d. Determine the cost per unit output for questions b and c.
Cost per unit when output = 8,000 units, in part c.

Item Calculation Cost
Cost of part A $.40 X 8,000 $3,200
Cost of part B $.35 X 8,000 2,800
Cost of part C $.15 X 8,000 1,200
Electricity $.01 X 8,000 80
Assembly 1 labor $.30 X 8,000 2,400
Final assembly labor $.30 X 8,000 2,400
Drilling labor $.15 X 8,000 1,200
Overhead $1,200 per week 1,200
Depreciation $30 per week 30
Total $14,510

Cost per unit = Total cost per week/Number of units produced per week
= $14,510/8,000
= $1.81

Cost per unit when output = 9,600 units, in part d.

Item Calculation Cost
Cost of part A $.40 X 9,600 $3,840
Cost of part B $.35 X 9,600 3,360
Cost of part C $.15 X 9,600 1,440
Electricity $.01 X 9,600 96
Assembly 1 labor $.30 X 9,600 2,880
Final assembly labor $.30 X 9,600 2,880
Drilling labor $.15 X 9,600 1,440
Overhead $1,200 per week 1,200
Depreciation $30 per week 30
Total $17,166

Cost per unit = Total cost per week/Number of units produced per week
= $17,166/9,600
= $1.79
?
e. The product is sold at $4.00 per unit. Assume that the cost of a drilling machine (fixed cost) is$30,000 and the company produces 8,000 units per week. Assume that 4 drilling machines are used
for production. If the company had an option to buy the same part at $3.00 per unit, what would be the break-even number of units?

Let X = the number of units that each option will produce.

When the company buys the units, the cost is $3.00 per unit (3X).

When it manufactures the units, they incur a fixed cost of $120,000 (4 drilling machines at $30,000 apiece) and a per-unit cost of $1.81. Therefore, 120,000 + 1.81X is the cost of this option.

Set the cost for the two options equal and solve for X to determine the breakeven point.

3X = 120,000 + 1.81X

X = 100,840 units. This is breakeven quantity

Therefore:
Buy the units when demand is less than 100,840, and
Produce them when demand is greater than 100,840 units.