Tuesday 14 May 2013

Assignment 16.1-16.4: Cost Evaluation

16.1

By using Equation 16.19;


a cyclone dust collector. 


Because of economy of scale, the new unit has 10 times the capacity as the unit purchased in 1985 will not cost 10x more. 

However, the purchase cost will have increased because of inflation in the 22 years since it was purchased in 1985. Assuming cost inflation in of 5% per year, the original cost of $35,000 is now equivalent to:



The cost estimation can be calculated as :


** This estimation is excluding the shipping cost, installation at plant and electrical and mechanical auxiliaries.


16.2


i) Overseas subcontractor
            Labor per shoe                                                             3.85
            Materials                                                                        8.00
            Shipping and import duty                                             4.50
            Operating cost                                                               2.00
                                                      
                                                        Total Cost                        :$18.35 
            Profit                                                                                1.65    ( 9% profit margin)
            Price to shoe company ( Total Cost + Profit )             = $20

ii) U.S. brand name shoe company
            Purchase from subcontractor                                      20.00
            Research and development                                         1.25
            Promotion and advertising                                           4.50
            Sales, G&A                                                                   5.00

                                                    Total Cost                             = $ 30.75
            Profit                                                                              5.25  ( 17% profit margin )
            Price to retailer ( Total Cost + Profit )                        = $36

iii) US Shoe retailer
           Purchase from shoe company                                    36.00
           Promotion and Advertising                                         10.00
           Labor and Shop Lot Rent                                           16.00

                                                  Total Cost                           = $62.00
          Profit                                                                               8.00      ( 13% profit margin )
          Price to customer ( Total Cost + Profit )                  = $70



16.3  



At the break-even point, QB, the cost of using hard tooling equals the cost of using soft tooling. The chief cost elements are:
·         the cost of tooling. CH = $7500 and CS = $600
·         the cost of tool setup. SH=$60 and SS = $100. Parts are made in batches, b, (lots) of 500 units.
·         the cost to make one part. CpH = $0.80 and CpS = $3.40




At the break-even point;







The break-even point gives the total production at which the hard tooling approach becomes more cost effective than soft tooling. Since the total production is 5000 units, the best decision is to use hard tooling if the time required to make to tools and prepare the production machines is compatible with the product development schedule.



The units for the basic equation above are:

 S + ( Part Units )( Batch/Part Units )( S/Batch ) + ( S / Part Units) ( Part Units) = $


16.4 



Prime cost
Direct labor                                                                 950,000
Direct material                                                            2,150,000
Direct expenses                                                           60,000
Direct engineering                                                        90,000
Direct engr. expenses                                                  30,000
                                                                                    3,280,000                                (1)
Factory expense
Plant utilities                                                              70,000
Plant & equip. depreciation                                        120,000
Warehouse expense                                                    60,000
Taxes & insurance                                                         50,000
                                                                                     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) 

This ignores corporate overhead, which should be small for a company of this size.

The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total cost by 0.15 to get the profit, and add this to cost to find the selling price.
However, this is not strictly correct. By definition:
  
Profit Margin = profit/sales = P/S = 0.15  

But, from Eq.(16.2), 

Sales = Total Cost + Profit

S=Ct + P = Ct = 0.15S;

S= Ct/0.85 = 4,694,118

The unit selling price of turbine is $4,694,118 / 60 units sold =    $78,235