Monday 15 December 2014

Assignment 9: Chapter 17

17.1:

In an environmental upgrade of a minimill making steel bar, it is found that a purchase must be made for a large cyclone dust collector. It is the time of the year for capital budget submissions, so there is no time for quotations from suppliers. The last unit of that type was purchased in 1985 for $35,000. It had a 100ft3/min capacity. The new installation in 2012 will require 1000ft3/min capacity. The cost escalation for this kind of equipment has been about 5 percent per year. For budget purposes, estimate what it will cost to purchase the dust collector.


SOLUTION:

C1 = C0 (L1/L0)x
C0= $35,000    L0= 100ft3/min
L1= 1000ft3/min          C1= ?
Based on Table 17.4, x for dust collector= 0.61. Because of economies of scale, the new unit has 10 times the capacity as the unit purchased in 1985 will not cost 10 times 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:
35000(1+0.05)22 = 35000(2.92526) = $102389

Thus, the cost estimation can be calculated as:
C= 102389(1000/1000)0.61 = $777000


17.2:

Many consumers item today are designed in the United State and manufactured over-seas where labor cost is much lower. A middle range athletic shoe from a name brand manufacturer sells for $70 in the U.S. The shoe company buys the shoe from an off-shore supplier for $20 and sells to the retailer for $36. The profit margin for each unit in the chain is: supplier-9%, shoe company-17%, retailer-13%. Estimate major categories of cost breakdown for each unit of chain. Do this as a team problem and compare the results for the entire class.


SOLUTION:

Estimation of the major categories of cost breakdown for each unit in the chain :

Shoe Company
Production labor                               $2.75
Materials                                            $9.00
Rent, equipment                                $3.00
Supplier’s operating profit              $1.75
Duties                                                 $3.00
Shipping                                             $0.50
Total cost                                          $20.00


Retailer
Research and development             $20.50
Promotion and advertising              $4.00
Sales, distribution, admin                 $5.00
Company’s operating profit             $6.50
Total cost                                          $36.00

Consumer
Retailer’s rent                                    $20.00
Personnel                                           $15.00
Others                                                 $15.00
Retailer’s operating profit               $20.00
Total cost                                          $70.00


17.4:

A manufacturer of a small hydraulic turbine has the annual cost data given. Calculate the manufacturing cost and the selling price for the turbine:

Raw material and components costs                                              $2,150,000
Direct labor                                                                                               950,000
Direct expenses                                                                                       60,000
Plant manager and staff                                                                        180,000
Utilities for plant                                                                                     70,000
Taxes and insurance                                                                              50,000
Plant and equipment depreciation                                                    120,000
Warehouse Expenses                                                                             60,000
Office Utilities                                                                                          10,000
Engineering expenses (plant)                                                             90,000
Engineering staff and salaries (plant)                                             30,000
Administrative staff salaries                                                              120,000
Sales staff, salaries and commissions                                              100,000
Total Annual Sales                                                                                 60 units
Profit Margin                                                                                           15%

SOLUTION:

Variable costs
Raw material and components costs                                                          $2,150,000
Direct labor                                                                                                   $950,000
Direct expenses                                                                                             $60,000
Engineering expenses (plant)                                                                      $90,000
Engineering staff and salaries (plant)                                                        $30,000
Total Variable Costs                                                                                   $3,280,000

Factory Expenses
Utilities for plant                                                                                           $70,000
Taxes and insurance                                                                                    $50,000
Plant and equipment depreciation                                                             $120,000
Warehouse Expenses                                                                                   $60,000
Total Factory Expenses                                                                             $300,000

General and Administrative Expenses (G & A)
Plant manager and staff                                                                               $180,000
Office Utilities                                                                                                 $10,000
Administrative staff salaries                                                                         $120,000
Total G & A                                                                                                   $310,000


Manufacturing Cost = Variable costs + Factory Expenses + General and Administrative Expenses
                                    = $3,280,000 + $300,000 + $310,000
                                    = $3,890,000

Sales, staff, salaries and commissions      $100,000
Total Cost                                         = Manufacturing costs + Sales, staff, salaries and commissions = $3,990,000
Manufacturing cost for a turbine = $3,990,000
   
Total Annual Sales = 60 units
Selling Price for One Turbine    = S / 60 = $4,694,117.65 / 60
Selling Price                                           = $78,235.29 per unit


17.10:

A company has received an order for four sophisticated space widgets. The buyer will take delivery of one unit at the end of the first year and one unit at the end of each of the succeeding three years. He will pay for a unit immediately upon receipt and not before. However, the manufacturer can make the units ahead of time and store them at negligible cost for future delivery.
The chief component of cost of the space widget is labor at $25 per h. All units made in the same year can take advantage of an 80% learning curve. The first unit requires 100,000 h of labor. Learning occurs only in one year and is not carried over from year to year. If money is worth 16% after a 52% tax rate, decide whether it would be more economical to build four units the first year and store them, or build one unit in each of the four years.


SOLUTION:

For an 80% learning curve, n = -0.322. The first unit requires y1 = 100,000 h to build.

The cost of making four units in one year is:

(100,000 + 80,000 +70,175 +63,979) x $25/h = $7,853,850



No Advantage from Learning Curve: If we do not take advantage of the learning curve we would make one space widget each year for a total cost over four years of

(100,000) x $25 x 4 = $10,000,000. This neglects the cost of living escalation that would occur each year, but it will be assumed that this would equal the cost of maintaining widgets in storage for up to four years.


In terms of engineering economy, the problem becomes which of the two alternatives results in the lowest present value. The present value (P) after taxes, assuming that labor costs are paid at the end of the year (an unrealistic but conventional assumption in engineering economy), for the use of the learning curve situation is given as:



If the four units are made in four successive years,



= 0.48(2,155,172 + 1,857,907 + 1,601,644 + 1,380,728) =0.48(6,995,451)

= $3,357,816


Taking advantage of the learning curve saves over $100,000 in cost compared with making one widget each year and deferring the costs into the future. Making the widgets in a batch also frees up the work force to take on other profitable work.



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