Chapter 5 Calculation
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Chapter 5 Calculation

Course: MANAGEMENT mgt3904, Winter 2011

School: Assumption College

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Chapter 5 Calculation Page 194 Example Product (1) A department works one 8-hour shift, 250 days per year, and has these figures for usage of a machine that is currently being considered: Di Annual Demand (2) Pi Standard processing time per unit .(Hr) (3) Processing time needed (Hr) (2)*(3) Di * Pi 1 400 5.0 400*5 =2000 2 300 8.0 300*8 = 2400 3 700 2.0 700*2 =1400 Working one 8-hour shift 250...

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5 Chapter Calculation Page 194 Example Product (1) A department works one 8-hour shift, 250 days per year, and has these figures for usage of a machine that is currently being considered: Di Annual Demand (2) Pi Standard processing time per unit .(Hr) (3) Processing time needed (Hr) (2)*(3) Di * Pi 1 400 5.0 400*5 =2000 2 300 8.0 300*8 = 2400 3 700 2.0 700*2 =1400 Working one 8-hour shift 250 days a year provides an annual capacity= 8 *250 = 2000 hours per year=T Required volume = 5800 hours/(2000hours/machine =2.90 machines 5800 k NR = pD i i =1 T i = 5800/2000 where N R = number of required machines pi = standard processing time for product i Di = demand for product i during the planning horizon T = processing time available during the planning horizon Page 202 Cost-Volume Analysis Cost-volume analysis Focuses on the relationship between cost, revenue, and volume of output Fixed Costs (FC) tend to remain constant regardless of output volume Variable Costs (VC) vary directly with volume of output VC = Quantity (Q) x variable cost per unit (v) Total Cost TC = Q x v Total Revenue (TR) TR = revenue per unit (R) x Q Break-Even Point (BEP) BEP The volume of output at which total cost and total revenue are equal Profit (P) = TR TC = R x Q (FC +v x Q) = Q(R v) FC QBEP FC = R v P + FC Q= Rv TR = Q *r TP = TR TC TC =FC + Q * v Page 204 Example 3 The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a month payment of $6,000. Variable cost would be $2 per pie, and pies would retail for $7 each. FC =$6,000, v = $2/pie, R =$ 7/pie BEP , TP=0 = TR=TC a. How many pies must be sold in order to break even? QBEP FC = R v =$6,000/($7-$2) = 1,200 pies per month b. What would be the profit (loss) be if 1,000 pies are made and sold in a month? = 1000 (7-2) 6000 Profit (P) = TR TC = R x Q (FC +v x Q) = Q(R v) = - $1,000 c. FC many pies must be sold to realize a profit of $4,000? How P + FC Profit (P) = TR TC = R x Q (FC +v x Q) = Q(R v) Q= FC Rv Q = ($4000 + $6000)/($7-$2) = 2000 pies d. If 2,000 can be sold, a profit target is $5,000, What price should be charged per pie? Profit = Q(R- v) FC $5000 = 2000(R - $2) -$6000 = 2000R -$4000 -$6000 = 2000R -$10000 R =$15000/2000 = $7.5/pie No 2/211 In a job shop, effective capacity is only 50 percent of design capacity, and annual output is 80 percent of effective output. What design would be capacity needed to achieve an actual output of eight jobs per week. Actual output Efficiency = = 80% Effective capacity Actual output = .8 (Effective capacity) Effective capacity = .5 (Design capacity) Actual output = (.5)(.8)(Effective capacity) Actual output = (.4)(Design capacity) Utilization Actual output = 8 jobs Utilization = .4 Actual output = Design capacity Actual output 8 Design Capacity = = = 20 jobs Effective capacity .4 No. 3/211 A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being consider will have fixed costs of $9200 per month and variable costs of 70 cents per unit produced. Each item is sold to retailers at a price that averages 90 cents. FC = VC = Rev = Q BEP $9,200/month $ .70/unit $ .90/unit a. What volume per month is required in order to breakeven? FC $9,200 = = = 46,000 units Rev VC $.90 $.70 QBEP FC = R v b. What profit would be realized on a month volume of 61,000 units 87,000 units? b. Profit = Rev x Q (FC + VC x Q) 1. P61,000 = $.90(61,000) [$9,200 + $.70(61,000)] = $3,000 2. P87,000 = $.90(87,000) [$9,200 + $.70(87,000)] = $8,200 No. 3/211 c. What volume is needed to obtain a profit of $16,000 per month? Specified profit + FC $16,000 + 9,200 / month Q= = = 126,000 units. Rev VC $.90 / unit $.70 / unit d. What volume is needed to provide a revenue of $23,000 per month? d. Total Revenue = Rev x Q, so Q = Total Revenue $23,000 = = 25,556 units R $.90 / unit $100,000 e. Plot the total costs & total revenue lines? TR =$90,000 @ Q = 100,000 units TR =$90,000 @ Q =100,000 units TC = $79,200 @ Q = 100,000 units TR TC Cost $50,000 TC =$79200 @ Q = 100,000 units $9,200 0 Volume (units) 100,000 Chapter 5 Overview Strategic Capacity Planning for Products and Services Goal;185 Key Questions;186 Capacity decisions;187 Effective Capacity;189 Measuring System Effectiveness : Efficiency,Utilization;188 Economies of Scale, Diseconomies of Scale, The Capacity Strategies; 191 optimal operating level is at Leading, Following,Tracking the minimum average unit cost ;200 k NR = Cost-Volume Analysis; 202; 204 Example 3, BEP, pD i i =1 i Calculating Processing Requirements; 193 T where N R = number of required machines pi = standard processing time for product i Di = demand for product i during the planning horizon T = processing time available during the planning horizon Capacity cushion = 100% - Utilization ; 192
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