ADMS3510F04FinalSolutions

ADMS3510F04FinalSolutions - YORK UNIVERSITY Atkinson...

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YORK UNIVERSITY: Atkinson Faculty of Liberal & Professional Studies ADMS 3510 3.0 Final Examination, December 20 th 2004 7:00 to 10:00 pm SOLUTIONS Question 1: (25 marks: allow 45 minutes) The Sinclair Co sells 300,000 of subunit #23 to the automotive and truck industry, Sinclair has a capacity of 110,000 machine-hours and can produce 3 subunits per machine-hour. Subunit #23’s contribution margin is $8. Sinclair sells only 300,000 subunits because 30,000 subunits (10% of good subunits) need to be reworked. It takes one machine-hour to rework 3 subunits so that 10,000 hours of capacity are lost in the rework process. Sinclair’s rework costs are $210,000. Rework consists of: Direct materials and direct rework labour (variable costs): $3 per unit Fixed costs of equipment, rent and overhead allocation: $4 per unit Sinclair’s process designers have come up with a modification that would maintain the speed of the process and would ensure 100% quality and no rework. The new process would cost $315,000 per year. The following additional information is available: 1) The demand for Sinclair’s subunit #23 is 370,000 per year. 2) The Jackson Corporation has asked Sinclair to supply 22,000 #XL5 subunits if Sinclair implements the new design. The contribution margin per #XL5 subunit is $10. Sinclair can make two #XL5 subunits per machine-hour with 100% quality and no rework. Required: a) Suppose Sinclair’s designers implemented the new design. Should Sinclair accept Jackson’s order for 22,000 #XL5 subunits? Explain why or why not. b) Should Sinclair implement the new design? c) What non-financial and qualitative factors should Sinclair consider in deciding whether to implement the new design?
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SOLUTION (Q19-27 modified) The idea is to first evaluate the best action that Sinclair should take if it implements the new design (that is, make or not make XL5). Sinclair can then compare the best mix of products to produce if it implements the new design against the status quo of not implementing the new design. 1. Sinclair has capacity constraints. Demand for Subunit 23 (370,000 subunits) exceeds production capacity of 330,000 subunits (3 subunits per hour x 110,000 machine-hours). Since capacity is constrained, Sinclair will choose to sell the product that maximizes contribution margin per machine-hour (the constrained resource). Contribution margin per machine-hour for subunit #23= $8 each x 3 subunits per hour = $24 Contribution margin per machine-hour for XL5= $10 per valve x 2 subunits per hour = $20 Sinclair should reject Jackson Corporation's offer and continue to only manufacture Subunit #23. 2. Now compare the alternatives of (1) not implementing the new design versus (2) implementing the new design. By implementing the new design, Sinclair will save 10,000 machine-hours of rework time. This time can then be used to make and sell 30,000 (3 subunits per hour x 10,000 hours) additional Subunit 23. The relevant costs and benefits of implementing the new design follow: The relevant costs of implementing the new design $(315,000) Relevant benefits: (a) Savings in rework costs ($3 a per #23 subunit x 30,000 subunits) 90,000 (b) Additional contribution margin from selling another
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