Metters Cabinets, Inc., needs to choose a production method for its new office shelf, the Maxistand. To help accomplish this, the firm has gathered the following production cost data:
Metters Cabinets projects an annual demand of 24,000 units for the Maxistand. The Maxistand will sell for $120 per unit. a) Which process type will maximize the annual profit from producing the Maxistand?
b) What is the value of this annual profit?
a)
To determine: The process type that will maximize the annual profit by producing the Maxistand.
Answer to Problem 9P
The process type that will maximize the annual profit by producing the Maxistand is the intermittent process.
Explanation of Solution
Given information:
Process type | Annual fixed cost of plant & equip |
Variable costs (Per Unit) ($) | ||
Labor | Material | Energy | ||
Mass customization | $1,260,000 | 30 | 18 | 12 |
Intermittent | $1,000,000 | 24 | 26 | 20 |
Repetitive | $1,625,000 | 28 | 15 | 12 |
Continuous | $1,960,000 | 25 | 15 | 10 |
Annual demand = 24,000 units
Maxistand selling price = $120 / unit
Calculation of number of units:
Let ‘x’ be the number of units. The units is calculated by multiplying annual fixed cost with ‘x’ and summing with the total variable cost and equating it with multiplying the Maxistand selling price with ‘x’.
Mass customization:
Intermittent:
Repetitive:
Continuous:
Identifying least cost process at x = 24000 units:
The least cost is calculated by multiplying variable cost with the value of ‘x’ and summing it with the annual fixed cost.
Mass customization:
Intermittent:
Repetitive:
Continuous:
The cost is lower for intermittent process ($2,680,000) with the break-even point of 20,000. The intermittent process will increase the annual profit.
Hence, the best process is the intermittent process.
b)
To determine: The annual profit by following the intermittent process.
Answer to Problem 9P
The annual profit is $200, 000
Explanation of Solution
Given information:
Process type | Annual fixed cost of plant & equip |
Variable costs (Per Unit) ($) | ||
Labor | Material | Energy | ||
Mass customization | $1,260,000 | 30 | 18 | 12 |
Intermittent | $1,000,000 | 24 | 26 | 20 |
Repetitive | $1,625,000 | 28 | 15 | 12 |
Continuous | $1,960,000 | 25 | 15 | 10 |
Annual demand = 24,000 units
Maxistand selling price = $120 / unit
Calculation of number of units:
Let ‘x’ be the number of units. The units is calculated by multiplying annual fixed cost with ‘x’ and summing with the total variable cost and equating it with multiplying the Maxistand selling price with ‘x’.
Mass customization:
Intermittent:
Repetitive:
Continuous:
Identifying least cost process at x = 24000 units:
The least cost is calculated by multiplying variable cost with the value of ‘x’ and summing it with the annual fixed cost.
Mass customization:
Intermittent:
Repetitive:
Continuous:
Calculation of annual profit:
The annual profit is calculated by multiplying the selling price with annual demand and subtracting it from the cost of the intermittent process.
The annual profit is $200, 000.
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Chapter 7 Solutions
Principles Of Operations Management