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) = $
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/0.85 = 4,694,118
The unit selling price of turbine is $4,694,118 / 60 units sold = $78,235
