process selection: volume drives costs and profits cob 300c busing
TRANSCRIPT
Process Selection: Volume Drives Process Selection: Volume Drives Costs and ProfitsCosts and Profits
COB 300CCOB 300C
BusingBusing
Process Selection
• Process selection includes:
– Technical issues–basic technology used to produce a service or good
– Volume or scale decision–using the proper amount of mechanization to leverage the organization’s work force
MECHANIZATION
Work Force
Product Design, Process Selection, and Capacity Decisions
Volume Drives Costs (Slide 1 of 3)
Quick-as-a-Blink Printing Center needs to invest in equipment to bind books. Management could purchase manual or automatic binding equipment.
Annual Variable
Fixed Labor Production
Machine Cost Cost Rate
Manual $1,000 $18/hr 10 units/hr
Automatic $9,000 $2/hr 100units/hr
The total-cost equation is as follows:
TC = FC + (VC) (Xp)
Volume Drives Costs (Slide 2 of 3)
Manual:
TC= $1,000+ (1,000 units)
= 2,800
Unit Cost=
= $2.80 per unit at volume 1,000
$18/hr
10 units/hr
$2,800
1,000
Automatic:
TC = $9,000+ (1,000 units)
=$9,020
Unit cost =
= $9.02 per unit at volume of 1,000
$2/hr
100 units/hr
$9,0201,000
Volume Drives Costs (Slide 3 of 3)
Power of Volume toReduce Costs
Volume Manual Automatic
$/unit $/unit
1,000 $2.80 $9.02
10,000 1.90 .92
100,000 1.81 .11
Finding the Pointof Indifference
At what production volume are the costs of the manual and the automatic binding equipment equal?
Total cost manual = Total cost automatic
$1,000 + ? (X) = $9,000 + ? (X)
1,000 + 1.80(X)= 9,000 + .02(X)
Solve for X:
(1.8 - .02) (X) = 9,000 - 1,000
X = 8,000 / 1.78
X = 4,494 units
$18 $2
10 units 100 units
Understanding the Scale Factor
• Economies of scale doctrine
– most efficient size for a facility
– most efficient size for a firm
– Put a large volume of the same product across the same equipment or fixed cost base.
• Economies of scope occurs when a large volume and high variety of products are produced by the same equipment for fixed cost base
Scale Factor: Cost-VolumeProfit Model (Slide 1 of 3)
TR= (SP) (Xs)
TR = Total Revenue
SP = Selling price/unit
Xs = Number of units sold
TC = FC + (VC) (Xp)
TC = Total cost
FC = Fixed cost
VC = Variable cost/unit
Xp = Number of units produced
Scale Factor: Cost-VolumeProfit Model (Slide 2 of 3)
The profit (P) equation is
P = TR -TC
P = SP(Xs) - {FC + VC(Xp)}
If X= Xs = Xp, then
P = SP(X) - {FC + VC(X)}
P = SP(X) - VC(X) - FC
P + FC = (SP - VC)(X)
Scale Factor: Cost-VolumeProfit Model (Slide 3 of 3)
Solve for X as follows:
X =
If C is defined as contribution/unit, then C = (SP - VC).
Then the equation becomes
X=
(P + FC)
(SP - VC)
C
(P + FC)
Cost-Volume-Profit Model
Assumptions of theCost-Volume-Profit Model
• Sales volume is equal to production volume
• Total cost and total revenue are linear functions of volume
• Historical data on costs and selling price are representative of what will happen in the future
• The organization has only one product
Hint: Fixed cost shared by all 3 products. Coffee Pot Mixer Blender
Product mix 45% 20% 35%
Selling price/unit 12 16 9
Variable cost/unit 6 7 4
Contribution unit 6 9 5
Profit target = $20,000/yr.
Fixed cost = $30,000/yr.
WC = .45($12/unit - $6/unit) + .2($16/unit - $7/unit) +.35($9/unit -$4/unit)
= $6.25 unit
Multiple-Product Case (Slide 1 of 3)
WC M SP VCi i ii
n
( )
1
Multiple-Product Case (Slide 2 of 3)
In the multiple-product case, the weighted contribution per unit substitutes for the contribution per unit.
X=
= $20,000 + $30,000
$6.25/unit
= 8,000 units
P + FC
WC
Multiple-Product Case (Slide 3 of 3)
Interpreting the results: The variable X is measured as a composite unit,
that is, a unit consisting of 45% coffee pot, 20% mixer and 35% blender. One composite unit
.45 .2 .35
Coffee Pot Mixer Blender
Product Mix No. Required
Coffee Pot .45 3,600 units
Mixer .20 1,600 units
Blender .35 2,800 units
8,000 units
Cost Structure of Low-Volume Producer
Cost Structure ofHigh-Volume Producer
Operating Leverage
Matching Process Alternatives with Product Characteristics
Characteristics of theProcess Alternatives
Process Flows Before and After Applying Group Technology (Slide 1 of 2)
Process Flows Before and After Process Flows Before and After Applying Group Technology Applying Group Technology (Slide 2 of 2)(Slide 2 of 2)
Automation Systems
Problems with Managing Large, Unfocused Operations (Slide 1 of 2)
• Growing facilities add more levels of management and make coordination and control difficult
• New products are added to the facility as customers demand greater product variety
• Hidden overhead costs increase as managers add staff to deal with increased complexity
Problems with Managing Large, Unfocused Operations (Slide 2 of 2)
• The result is higher operating costs
– Productive time is being taken to do setups
– More mistakes are made by attempting to manage increasing complexity with control systems designed for a single product facility
Focused Factory
• Smaller facility (less than 500 employees) concentrates on one or few products
• Limits scope of operations to a few process technologies
• Strives only for highest level of quality
• Strives for simplicity in management and control