Production Management Assignment

Saturday, 8:00AM 11:00PM, Rm 218

Ismael C. Pangilinan

Carl Cesar H. Bibat
M.S. Management Engineering

PROCESS DESIGN EXERCISES

1. Borges Machine Shop, Inc, has a one year contract for the production of 200,000 gear housings
for a new off-road vehicle. Owner Luis Borges hopes the contract will be extended and the
volume increased next year. Borges has developed costs for the three alternatives. These are
general-purpose equipment(GPE), flexible manufacturing system (FMS), and expensive , but
efficient , dedicated machine(DM). the cost data follow;
GPE FMS DM
Annual contract units 200,000 200,000 200,000
Annual fixed cost $100,000 $200,000 $500,000
Variable cost/unit $15.00 $14.00 $13.00
Which process is best for this contract?

Solution to Problem #1:

Compare the Total Cost that each alternative may incur:
Total Cost (TC) = Fixed Cost (FC) + [Variable Cost (VC) x Annual Contract Units (ACU)]

For GPE:
TC
GPE
= $100,000 + ($15.00 x 200,000)
= $3,100,000
For FMS:
TC
FMS
= $200,000 + ($14.00 x 200,000)
= $3,000,000
For DM:
TC
DM
= $500,000 + ($13.00 x 200,000)
= $3,100,000

2. Stan company is considering producing a gear assembly that it now purchases from SLT Supply
Inc. SLT charges $4 per unit with a minimum order of 3,000 units. Stan estimates that it will cost
$15,000 to set up the process and then $1.82 per unit for labor and materials.
a. Draw a graph illustrating the point of indifference(crossover).
b. Determine the number of units where either choice has the same cost.

A.

Fixed Cost
Variable
Cost per unit
Stan Company 15000 1.82
SLT Supply Inc. 0 4

Answer:
By comparing the alternatives, the
lowest cost of the three alternatives is
Flexible Manufacturing System with
only $3,000,000.

Stan
Company
SLT Supply
Inc
Units TC TC
0 15000 0
1000 16820 0
2000 18640 0
3000 20460 12000
4000 22280 16000
5000 24100 20000
6000 25920 24000
7000 27740 28000
8000 29560 32000
9000 31380 36000
10000 33200 40000












B. No. of Units where either choice has the same cost.
$15,000 + $1.82x = $4x
$15,000 = $2.18x
X = 6,880.73 units
X = 6881 units
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
0 2000 4000 6000 8000 10000 12000
T
o
t
a
l

C
o
s
t
,

$

No. of Units
Comparison of Total Cost
Stan Company SLT Supply Inc
Crossover point
6881 units