10-28 Requirements

1. Calculate the target cost for maintaining current market share and profitability.2. Can the target cost be achieved? How?

Solution

Unit Cost $548.60Current Profit $61.40

New target cost (to meet competitve price) $487.20

2. The target cost can probably be achieved by efforts in two areas:

a. The standard cost analysis shows an unfavorable materials variance of $500,000 ($7,000,000 - $6,500,000) or $20 per unit, a very significant variance. Efforts to reduce or eliminate this variance will make the firm much more competitive. Notice that the labor usage variance for indirect labor is favorable, and the direct labor variance is is unfavorable. It may be that additional work is needed setting the standards.

b. The standard cost shows an unfavorable direct labor variance of $125,000 ($2,625,000 - $2,500,000), or $5 per unit, an opportunity for cost savings.

c. The remaining manufacturing costs can be considered non-value-adding costs, since they do not add to the functionality or quality of the product. Efforst can be made to reduce the total cost of these manufacturing costs, which now total a significant $4,090,000, or $163.60 per unit.

10-29 Requirements

Determine the manufacturing cycle efficiency (MCE) for the recent month. What can you infer from the MCE you calculated?

Solution

10-30 Requirements

1. What is the Takt time for this product?2. Is the processing line properly balanced for this product? Why or why not?3. What is the strategic role of Takt time, and how is it implemented by the cost-management analyst?

Solution

1. The Takt time for this product is the number of available hours/total demand:

Total Manufacturing time 252,000 secSeconds per unit 30 sec

2. The processing line is not properly balanced. Operation 2 exceeds takt time by 4 sec. and Operation 3’s time is somewhat less than takt time. To balance the line, so that products can be expected to come off the line every 30 seconds as needed, the capacity of operation 2 should be increased so that it could speed up its operation. Similarly, operation 3 could reduce capacity and resources to save money; we do not need this operation to move so fast. 3. The strategic role of takt time is to help operations managers to balance the operations and to improve the speed of throughput and reduce cycle time. The management accountant’s role is to provide information on the costs of processing time and capacity, and the value of increasing throughput. TOC analysis attempts to accomplish this by maximizing the flow through the constraints/operations.

10-31 Requirements

Solution

1 and 2:

Activity-based CostsA-10 A-25 A-10 A25

Direct MaterialsMaterials HandlingMfg SupervisionAssemblySet-upsInspection and TestPackaging Total

PriceMargin

3. The solution uses Goal Seek in Excel. The number of parts must be reduced to 101 or fewer to get a minimum margin of $50.

1) Calculate the product cost and product margin for each product. 2) A new competitor has entered the market for lens-polishing equipment with a superior product at significantly lower prices, $825 for the A–10 model and $595 for the A–25 model. To try to compete, BSI has made some radical improvements in the design and manufacturing of its two products. The materials costs and activity usage rates have been decreased significantly. Calculate the total product costs with the new activity usage data. Can BSI make a positive gross margin with the new costs, assuming that it must meet the price set by the new competitor? 3) Assume the information in requirement 2, but that BSI management is not satisfied with the gross margin on the A–10 after the cost improvements. BSI wants a $50 gross margin on A–10. Suppose you are able to change the number of parts to reduce costs further to achieve the desired $50 margin. How much would the number of parts have to change to provide the desired gross margin? [Hint: Use an Excel spreadsheet, and use the Goal Seek function. ] 4) What cost management method might be useful to BSI at this time, and why?

10-32 Requirements

1. What are the current profit margins on both trips?2. Take-a-Break's management believes that it must drop the price on the Cancun trip to $710 and on the Jamaica trip to $650 in order to remain competitive in the market. Recalculate profit margins for both packages at these price levels.3. Describe two ways that Take-a-Break Travel could cut its costs to get the profit margin back to their original levels.

Solution

1.

Package Specifications COST Cancun Jamaica

Oceanfront room; number of nights $180 $120 Meals: Breakfasts $35 $25 Lunches $49 $35 Dinners $60 $0 Scuba diving trips $60 $30 Water skiing trips $50 $20 Airfare (round trip from Miami) $200 $355 Transportation to and from airport $15 $10

$649 $595

Cancun: ($750 - $649 total costs)/$ 750 = 13.47% profit margin Jamaica: ($690 - $595)/$690 = 13.77% profit margin

2. Cancun ($710 - $649 total costs)/ $710 = 8.59% profit margin Jamaica: ($650- $595)/$650= 8.46% profit margin

3. The airfare costs are the largest component of cost and this category could have room for improvement. By further negotiating group discount rates or searching for lower cost discount carriers, Take-a-Break could lower its cost in this category. Room costs also comprise a major portion of total package costs. While Take-a-Break could negotiate deals with off-beachfront hotels or opt for non-oceanfront rooms, this might decrease the value of the trip in the eyes of its customers. A better option would be to further negotiate group rates with its current hotel providers.

10-33 Requirements

1. Calculate the current cost and profit per unit.2. How much of the current cost per unit is attributable to non-value-added activities?3. Calculate the new target cost per unit for a sales price of $2,850 if the profit per unit is maintained.4. What strategy do you suggest for Weekend Golfer to attain the target cost calculated in requirement 3?

Solution

10-34 Requirements

1. Determine the price for the part using a markup of 55 percent of full manufacturing cost.2. Determine the price for the part using a markup of 30 percent of full life-cycle cost.3. Determine the price for the part using a desired gross margin percentage to sales of 40 percent.4. Determine the price for the part using a desired life-cycle cost percentage to sales of 25 percent. 5. Determine the price for the part using a desired before-tax return on investment of 15 percent.6. Determine the contribution margin and operating profit for each of the methods in requirements 1 through 5. Which price would you choose, and why?

Solution

Annual volume (units) = 30,000Total variable costs = $2,500,000Total fixed costs = $1,760,000Total mfg costs = $3,410,000Total life-cycle cost = $4,260,000Per-unit manufacturing cost = $113.67Per-unit life-cycle cost = $142.00

ANSWER TO PART 6…………………….Desired Rate Contribution

Method: for Markup Price MarginMarkup on full manufacturing cost 55% $ 176.183 $ 2,785,500 Markup on life cycle costs 30% $ 184.600 3,038,000 252,500 Price to Achieve Desired GM % 40% $ 189.444 3,183,333 Price to Achieve Desired LCC % 25% $ 189.333 3,180,000 Price to Achieve Desired ROA of 15% 42.25% $ 202.000 3,560,000

The above pricing methods yield prices from $176.00 to $202.00. The highest price, $202.00, has the advantage that it

The price, contribution, and profit information is as follows. 1. $176.183 = $3,410,000 X 1.55 / 30,000 2. $184.60 = $4,260,000 X 1.3 / 30,000 3. $189.444 = $113.67 / (1 - .4) 4. $189.333 = $142.00 / (1 - .25) 5. $202.00 = $142.00 X (! + .4225) Where: .4225 = ($12,000,000X.15) / (30,000X$142

10-35 Requirements

Matt is happy with the steady rental average of 6,400 per year. For this number of rentals, what price should he chargeper rental in order for the business to make a 20 percent life-cycle return on investment?

Target Life-Cycle ROI 20.00%Annual rentals 6,400

Solution

10-36 Requirements

Activities and Market Characteristics Life Cycle Stage Decline in sales Decline Advertising Introduction Boost in production Growth Stabilized profits Maturity Competitor’s entrance into market Growth Market Research Introduction Market Saturation Maturity Start Production Introduction Product Testing Introduction Termination of Product Decline Large Increase in sales Growth

10-37 Requirements

Evaluate the compensation plan for this contract, with the fixed fee of 10 percent and the incentivefee of 5 percent. What do you think is the role of the incentive fee, and do you think it is too large or too small?

Solution

Source: "The Right Stuff for the Gis of the Future," Business Week, August 15, 2005, pp. 74-75.

10-38 Requirements

Consider differences in competitive strategy and the product sales life-cycle and develop an explanationof which types of firms you think would have more difficulty in raising prices and those that would have less.

Solution

This exercise is intended for a brief class discussion. The objective is to identify the factors that are critical in allowing some firms to have more pricing flexibility than others. The discussion should touch on the importance of distinguishing cost leadership firms, for whom the market price is set by low-cost global suppliers, and who therefore have little pricing flexibility, versus differentiated firms, who will have more flexibility in setting prices because of the innovation and features of their product or service. Also, considering the sales life cycle can help. Firms in the introduction and growth phases of their product or service life cycle will have more flexibility about setting prices than those in the mature phase of the life cycle, where there is more effective price competition. Geoffrey Colvin, writing in Fortune, points out that many firms today have less flexibility in setting prices. The factors that have traditionally provided pricing power are brands, intellectual property, and high entry barriers: Brands: Colvin points out that many brands, including Coke, Nike, and McDonalds, are under attack from a number of sources, including those who are opposed to what they see as the social ills caused by these firms Intellectual Property: Colvin points out that firms around the world are having more success at copying, legally or illegally, the patented products such as Viagra, or entertainment products – music and movies High Entry Barrier: As Michael Porter notes (chapter 2), high entry barriers for an industry can protect it from competition, through high costs of facilities, patents, government regulations, etc. However, Colvin notes that many of these barriers can now be hurdled by companies that use new technologies, including the Internet. Source: Geoffrey Colvin, “Pricing Power Ain’t What it Used to Be,” Fortune, September 15, 2003, p 52.

10-39 Requirements

1. Using the information Hannah has developed, determine the importance index for each component (menu and food preparation, wait staff, and food ingredients).2. Compare your findings in Part 1 to the relative cost of the components. What conclusions can you draw from this comparison?

Solution

1. The calculations/steps are shown below:

Fourth: Determine Importance Index for Each Component

Customer CriteriaTaste Comfort Enjoyment Importance

Relative importance of criteria IndexThe % contribution of each component to each customercriterion: Menu and food prep Wait staff Food ingredients Total

Fifth: Compare Relative Importance to Relative Cost for Each Component

Importance RelativeComponents Index Cost Ratio Menu and food prep Wait staff Food ingredients Total

10-40 Requirements

1. What are the current profit margins on both systems?2. Alert's management believes that it must drop the price on the ICU 100 unit to $750 and on the ICU 900 unit to $1,390 to remain competitive in the market. Recalculate profit margins for both products at these price levels.3. Describe two ways that Alert could cut its costs to get the profit margins back to their original on both systems.

Solution

1. Cost and profit-margin information on products:

ICU 100 ICU 900

Video cameras $150 $450

Video monitors $75 $75

Motion detectors $75 $120

Floodlights $24 $56

Alarms $15 $30

Wiring (ft) $70 $110

Installation (hrs) $320 $520 TOTAL $729 $1,361 Profit $81 $159

Profit Margin 11% 12%

2. Recalculated profit margins:

Revised selling prices per unit (given) = $750 $1,390 Total cost per unit (part 1 above) = $729 $1,361 Profit, per unit = $21 $29

Profit margin percentage = 2.80% 2.09%

3. The installation costs are the largest component of cost and this category could have room for improvement. By redesigning the layout of the systems or finding componets that integrate more readily, the installation times could then be reduced. Also, costs could be lowered by contractual bargaining with electricians to reduce the per hour rates for installation.

The video equipment and motion detectors are sources of significant costs, but decreasing the quality or quantity of these items would substantially change the effectiveness and value of the security systems.

10-41 Requirements

1. Calculate the current cost and profit per unit.2. How much of the current cost per unit is attributable to non-value-added activities?3. Calculate the new target ost per unit for a sales price of $800 if the profit per unit is maintained.4. What strategy do you suggest for Benchmark to attain the target cost calcualted in requirement 3?

Solution

G & A Expense $225 $175 $50 Total Cost $1,425 $1,210 $215

The cost savings of $215 are not sufficient to get the total cost of the product ($1,210) down to the desired target cost of $1,200. Because National might be willing to pay a higher price, and since the cost difference is relatively small, it seems that Morrow should in fact pursue the order. Here are some other considerations:

a) Morrow should consider the short versus the long-term issues of taking on the order. In the short term, as noted in Chapter 3, the fixed costs of manufacturing the order will not change and therefore can be considered irrelevant for the order if it is a one-time, special order. Thus, for a short-term analysis, Morrow should determine that portion of manufacturing, marketing, and GS&A costs that are fixed and then exclude these costs from the analysis. In contrast, if Morrow expects this to be a regular customer, that Morrow will be supplying National these parts for several months or years, then the total costs including fixed costs are relevant, as in the calculations above. In the longer term, Morrow must cover all costs of production and sale, while in the short term, only the variable costs are relevant.

the basis of price, quality, and functionality. In Morrow's case, functionality refers not onloy to meeting product specifications, but also to "delighting" the customer with meeting delivery times, reducing lead times, and minimizing billing and shipping errors, as Morrow has done. In a "confrontation" type of competition, target costing is particularly valuable, as Cooper points out, because it provides the firm a mechanism for balancing and choosing the proper "bundle" of the three aspects of competition: price, quality, and funcationality. For example, to be most competitive, Morrow must spend extra dollars to ensure that there are few if any billing and shipping errors, while at the same time reducing the cost of manufacturing the product, and maintaining or improving product quality.

c) The problem notes that the manufacturing costs are "standard" full costs. Since the costs are given at standard, this means that there are no apparent inefficiencies reflected in the reported $1,425. However, the question still remains whether the standard costs are properly determined. Should the standards be revised?

b) Morrow appears to compete in what Robin Cooper calls the "confrontation" strategy (When Lean Enterprises Collide, Harvard Business School Press, 1995), wherein each competitor must simultaneously compete on

10-43 Requirements

1. Calculate the target cost required for MD Plus to maintain its current market share and profitability in 2007.2. Because of rising inflation, MD Plus will charge $125 in 2008 while Doctors Nationwide will increase its premium by $15. Expenses for MD Plus are expected to increase by 6.8% in 2008. Based on the projected enrollees, calculate the target cost.3. Identify the critical success factors for MD Plus. How can the HMO maintain its market share?

Solution

10-44 Requirements

McFee has estimated that it can reduce the number of purchasing orders to 700 and can decrease the cost of each shipment $5 with minor changes in its operations. Any further cost savings must come from reengineering the warehousing processes. What is the maximum cost (i.e., the target cost) for warehousing activities if the firmdesires to earn the same amount of profit nex year?

Solution

New number of purchase orders 700 decrease in shipping costs $ 5

Current Year Operating IncomeSales ($20 x 100,000) = $2,000,000 Costs:

Purchase ($10 x 100,000) $1,000,000 Purchasing order (150 x $1,000) $150,000 Warehousing ($30 x 8,000) $240,000 Distributing ($80 x 500) $40,000 Fixed operating cost $ 250,000 $1,680,000

Operating income $320,000

Determination of Target Cost:Sales ($20.00 x 100,000 x 0.90) $1,800,000 Desired profit (given) $320,000 Costs:

Purchase $980,000 Purchasing order $105,000 Distributing $37,500 Fixed operating cost $ 250,000 $1,372,500

Maximum allowable costs for warehousing $107,500

Warehousing costs must be reduced from $240,000 to $107,500, a reduction of $132,500.

10-45 Requirements

1. What is the target manufacturing cost for shoes to be sold in the United States?2. Which features, if any, should Harpers add for shoes to be sold in the United States?3. Critically evaluate Harpers' decision to begin selling shoes in the United States.

Solution

10-46 Requirements

1. Using the information in Table 2 developed by the team of engineers and sales managers, together with the customer criteria, determine which components of the boat are most important to customers, and why.2. Take your findings in requirement 1 and compare them against the target cost figures in Table 1. What conclusions can you draw from this comparison?

Solution

Criteria Customer RatingSafety 33%Styling 15%Performance 20%Comfort 32%

100%

Safety Styling Performance ComfortCriteria Value 33% 15% 20% 32%

Components:

Hull and keel 9.90% 6.00% 10.00% 9.60%

Standing rig 9.90% 3.00% 4.00% 3.20%

Sails 3.30% 1.50% 6.00% 3.20%

Electrical 6.60% 1.50% 0.00% 0.00%

Other 3.30% 3.00% 0.00% 16.00%

Value Index Cost IndexComponent: Ratio

Hull and keel 35.50% 30.00% 1.18

Standing rig 20.10% 15.00% 1.34

Sails 14.00% 17.00% 0.82

Electrical 8.10% 13.00% 0.62

Other 22.30% 25.00% 0.89100.00% 100.00% 1.00

2. When the value index is compared to the target cost, the percentage investment in hull & keel and standing rig look too low--the value index (VI) for hull and keel is 35.5% while the cost index is 30%;

10-47 Requirement

What is the best production plan for PEC? Why?

Solution

TOC Solution Spreadsheet

Products Name Demand Price Materials CostFirst PEC-1Second PEC-2

Time Req'd for Each Product Time

Activity Name AvailableFirst Receiving

10-48 Requirements

1. What is the most profitable production plan for Colton? Explain your answer with supporting calculations.2. How would you apply the five steps of the Theory of Constraints (TOC) to Colton's manufacturing operations?

Solution

TOC Solution Spreadsheet

Products Name Demand Price Materials CostFirst Table 400 $250.00 $100.00 Second Sofa 150 $450.00 $250.00

Time Req'd for Each Product Time (hrs.)

Activity Name Table Sofa AvailableFirst Cut 0.50 0.20 280 (2 x 35 x 4)Second Sand 0.50 0.50 280 (2 x 35 x 4)Third Assemble 0.75 1.50 700 (given)Fourth Stain 0.80 0.30 280 (2 x 35 x 4)Fifth Cut fabric 0.00 0.80 140 (1 x 35 x 4)

Part One: Identify the Constraint

Total Time Required for Each activity for Given DemanTime Slack

Table Sofa Total Time Available Time Cut 200 30 230 280 50 Sand 200 75 275 280 5 Assemble 300 225 525 700 175 Stain 320 45 365 280 (85)Cut fabric 0 120 120 140 20 Part Two: Identify Most Profitable Product

Table SofaPrice $250 $450Materials Cost $100 $250Throughput Margin $150 $200Constraint time 0.80 0.30 Throughput/hour $187.50 $666.67

Part Three: Identify Most Profitable Product Mix

Since sofas are the most profitable product through the staining constraint, we fill the sofa demandfirst, and then with the remaining staining capacity we fill as much of the table demand as possible.

Table SofaDemand 400 150Production of Sofas 150Availabiliy, Usage of Staining hours 235 45 280 Production of Tables 293 Throughput/hour (see above) $187.50 $666.67Total Throughput $54,938 $100,000 $154,938

2. Part 1 above solves the first two steps of the TOC, to indentify the constraint and determine the most profitable product mix. The third step, to maximize flow through the constraint, would require Colton to look for ways to speed up the staining operation, by simplifying it, by training the operator, or other means. In the fourth TOC step, Colton could consider adding a part-time employee to add capacity at the constraint, though it might be difficult to find a skilled employee who wanted part-time work. Additng a full-time employee would be unnecessary and wasteful, unless the motel contract works out. In the final TOC step, Colton should consider the possibility of redesign, by for example using a different type of stain that requires less time and skill.

10-49 Requirement

Prepare a short set of notes that Don can use in the executive meeting if questions come about about the problems at the Canton plant.

Solution

Data Time Required for each Product Time

Activity Name Polymer 1 Polymer 2 AvailableFirst Filtering 2 4 320Second Stripper 2 3 320Third Reactor 3 4 320Fourth Final Filter 2 1 160Fifth Mixing 3 3 320

Products Name Demand Price Variable cost First Polymer 1 60 145 45Second Polymer 2 40 185 60

10-50 Requirements

1. Determine whether Bakker can meet the monthly sales demand for the three products. What department, if any, is a constraint?2. What monthly production schedule would be best for Bakker Industries?

Solution

1. Bakker will not be able to meet the demand. Department 1 is a constraint, based on machine time. We do not consider labor time because Bakker is able to hire and retain all the labor it needs.

DEPARTMENT

Product 1 2 3 4

611 1,000 500 1,000 1,000

613 400 400 0 800

615 2,000 2,000 1,000 1,000TOTAL 3,400 2,900 2,000 2,800

available 3,000 3,100 2,700 3,300

excess (deficiency) (400) 200 700 500

2. The best product mix is 400 units of Product 613, 500 units of product 611, and 800 units of product 615.

611 613 615Price $196 $123 $167 Variable Cost* $103 $73 $97Throughput/unit $93 $50 $70 Machine hours in Dept 1 2 1 2Throughput/hour $46.50 $50.00 $35.00 * For example, variable cost for 611 = $(7 + 12 + 21 + 24 + 9 + 27 + 3)

Production/sales plan: Hours UnitsTotal hours available in Department 1 = 3,000First priority--Product 613 (400 units x 1 hr/unit) = 400 400Second priority--Product 611 (500 units x 2 hrs/unit) = 1,000 500Balance--Product 615 (all remaining hours, up to product demand) = 1,600 800

10-51 Requirements

1. Explain why Tim may be wrong in his assessment of the relative performances of the two products.2. Suppose that 80 percent of the R&D and selling expenses are traceable to Xderm. Prepare life-cycle income statements for each product and calculate the return on sales. What does this tell you about the importance of accurate life-cycle costing?3. Consider again your answers in requirements 1 and 2, and the the following additional information. R&D and selling expenses are substantially higher for Xderm because it is a new product. Tim has strongly supported development of the new product, including the high selling and R&D expenses. He has assured senior managers that the Xderm investment will pay off in improved profits for the company. What are the ethical issues, if any, facing Tim as he reports to top management on the profitability of the company's two products?

Solution

1.

2. Revised product-line income statements:

Xderm Yderm Total

SalesCost of goods soldGross profitResearch and developmentSelling expensesProfit before taxes

The life-cycle product line profitability analysis shows a much different result.

10-52 Requirements

1. How would a product life-cycle income statement differ from the above income statements?2. Prepare a three-year life-cycle income statement for both products. Which product appears to be more profitable?3. Prepare a schedule showing each cost category as a percentage of total annual costs. What do you think this indicates about the profitability of each product over the three-year life cycle?

Solution

1. A product life-cycle statement would aggregate the three years into one that shows the totals in each category for the life of the product.

2 and 3:

Part 2: L50 appears to be more profitable--$771 vs. $670 life-cycle profits.

L40 2005 2006 2007 TotalRevenues $ 800 $ 2,300 $ 3,100 $ 6,200 Costs

R&D 1,400 74% - 0% - 0% 1,400 25%Prototypes 350 19% 50 3% - 0% 400 7%Marketing 60 3% 600 38% 475 23% 1,135 21%Distribution 60 3% 120 8% 130 6% 310 6%Manufacturing 20 1% 770 48% 1,350 66% 2,140 39%Customer Serivce - 60 4% 85 4% 145 3%

Total Cost $1,890 $1,600 $2,040 $5,530

Operating Profit ($1,090) $700 $1,060 $670

L50 2005 2006 2007 TotalRevenues $ 900 $ 1,900 $ 2,200 $ 5,000 Costs

R&D 650 49% - 0% - 0% 650 15%Prototypes 300 23% 30 3% 10 1% 340 8%Marketing 124 9% 200 17% 260 15% 584 14%Distribution 170 13% 200 17% 410 23% 780 18%Manufacturing 85 6% 700 61% 770 44% 1,556 37%Customer Serivce - 20 2% 300 17% 320 8%

Total Cost $1,329 $1,150 $1,750 $4,229

Operating Profit ($429) $750 $450 $771

Part 3: The analysis shows how the distribution of costs for both products shifts from R&D in the first year to manufacturing

Sale of patent rights: Immediate receipt of cash = $300,000,000 Each year, for five coming years = $25,000,000 Sunk costs: R&D = $1,000,000 Clinical trials = $2,108,000

10-53 Requirements

Determine the best option for Cure-All. Support your answer.

Solution

Life-Cycle CostsIF CURE ALL MANUFACTURES IF CURE ALL OUTSOURCES

RevenuesCosts:

R&DClinical trialsManufacturing fixed variablePackaging fixed variableDistribution fixed variableAdvertising fixed variable

Total CostOperating Income

Thus, outsourcing the manufacturing results in a lower life-time operating income than manufacturing the drug.

3.

assumed discount rate = 10.00%Year PV factor, year no.

1 0.909090909090912 0.826446280991743 0.751314800901584 0.683013455365075 0.62092132305915

PV annuity factor = 3.79078676940845

Problem 10-54 Constraint Analysis, Flow DiagramsBackground

Silver Aviation assembles small aircraft for commercial use. The majority of its business is with small freightairlines serving areas whose airports do not accommodate larger planes. The remainder of Silver's customers are commuter airlines and individuals who use plnes in their businesses, such as the ownders of larger ranches. Silver recently expanded its market into Central and South America, and the company expects to double its sales over the next three years.

To schedule work and track all projects, Silver uses a flow diagram. The diagram for the assembly of a single cargo plane is shown in Exhibit 1. The diagram shows four alternative paths with the critical path being ABDEFJK. Bob Peterson, president of Coastal Airlines, recently placed an order with Silver Aviation for five cargo planes. Duringcontract negotiations, Bob agreed to a delivery time of 13 weeks (five work days per week) for the first plane, withthe balance of the planes being delivered at the rate of one every four weeks. Because of problems with some of theaircraft that Coastal is currently using, Bob contacted Grace Vander, sales manager for Silver Aviation, to ask about improving the delivery date of the first cargo plane. Grace replied that she believed the schedule could be shortenedby as much as 10 work days or two weeks, but the cost of assembly would increase as a result. Bob said he would be willing to consider the increased costs, and they agreed to meet the following day to review a revised schedule that Grace would prepare.

Because Silver Aviation previously assembled aircraft on an accelerated basis, the company has a list of "crash

schedule at a minimum increase in cost to Coastal Airlines. Upon completing her plan, she reported to Bob that Silver would be able to cut 10 working days from the schedule for an associated increase in cost of $6,000. Grace's

and cost.

Exhibit 2

costs" for this purpose. Grace used the data shown in Exhibit 2 to develop a plan to cut 10 working days from the

Exhibit 3 shows accelerated assembly schedule for the cargo plane starting from the regularly scheduled days

Expected Acitivity Times Direct Cost

Activity Regular Crash RegularAB Fame fusalage 20 16 $12,000BC Wing placement 6 5 $3,600CD Engine mount 9 7 $6,600DE Landing gear 7 5 $5,100BE Cargo doors 3 3 $1,400BG Electical wiring 15 13 $9,000GE Instrument panel 8 6 $5,700EF Electrical tests 11 10 $6,800GH Exterior shell 9 7 $4,200FJ Interior finish 8 7 $3,600HJ Exterior paint 6 5 $3,600JK Final testing 3 2 $3,500

$65,100

Exhibit 3Accelerated Plane Assembly

Total No. of Activity Crashed Add'l Cost/Day Direct Cost Days

$65,100HJ by one day $400 $65,500 1FJ by one day $400 $65,900 1GH by two days $500 $66,900 2CD by two days $700 $68,300 2EF by one day $800 $69,100 1DE by two days $800 $70,700 2BG by one day $1,000 $71,700 1

10-54 Requirements

1. Explain why Grace's plan is unsatisfactory.2. Revise the accelerated assembly schedule so that Coastal Airlines will take delivery of the first plane ahead of schedule at the least incremental cost to Coastal.3. Calculate the incremental costs that Bob will have to pay for this revised accelerated delivery.

Solution

1. Grace Vander's accelerated delivery schedule is unsatisfactory in cutting 10 days from the total project schedule because not all of her crashed activities are included on the Critical Path. In order to reduce the completion time for a project, activities along the critical path need to be chosen to be crashed or reduced. Vander's slection of activities FJ, EF, and BG, which are on the critical path ABGEFJK, will reduce total project completion time only by three days, but her selection of activities HJ, GH, CD, and DE have no impact on the critical path.

2. Below is a revised accelerated delivery schedule that meets both objectives: (1) delivery of the first plane two weeks (10 working days) ahead of schedule, and (2) at the lowest incremental cost to Coastal. All the paths need to be evaluated when reducing a project's completion time. However, the selection of activities to crash should be taken from the critical path first and then the activities should be slected in order according to the smallest crash cost. The critical path now becomes ABCDEFJK and will take 57 days, having only reduced the total project completion date by eight days. Therefore, the activity CD (the next least-costly available activity) needs to be crashed two days, which will then bring all paths to 55 days or less.

The first path, ABGEFJK, crashed 10 days would cost $10,200, as shown below:

Activity Crashed Days Reduced

STARTFJ 1 $400 $400 EF 1 800 800JK 1 900 900BG 2 1,000 2,000AB 4 1,200 4,800GE 1 1,300 1,300

Total $10,200

The second path, ABCDEFJK, which crashes less expensive activities, is less expensive overall, and thus a bettercrash schedule. The ABCDEFJK path, before crash, has a time of 64, so that the table begins with 64.

Activity Crashed Days Reduced

Incremental Cost per day

Incremental Cost

Incremental Cost per day

Incremental Cost

STARTFJ 1 $400 $400 EF 1 800 800JK 1 900 900AB 4 1,200 4,800CD 2 700 1,400

Total $8,300

Note that the activities BG and GE are not crashed in the final solution because they are not on the critical path. Reducing time on these activities will not reduce the overall project time.

3. The total incremental costs Bob Peterson will have to pay for this revised accelerated delivery schedule amount to $8,300, or a new total project cost of $73,400 from the original $65,100, and a saving of 10 days.

Problem 10-54 Constraint Analysis, Flow Diagrams

Silver Aviation assembles small aircraft for commercial use. The majority of its business is with small freightairlines serving areas whose airports do not accommodate larger planes. The remainder of Silver's customers are commuter airlines and individuals who use plnes in their businesses, such as the ownders of larger ranches. Silver recently expanded its market into Central and South America, and the company expects to double its sales

To schedule work and track all projects, Silver uses a flow diagram. The diagram for the assembly of a single cargo plane is shown in Exhibit 1. The diagram shows four alternative paths with the critical path being ABDEFJK. Bob Peterson, president of Coastal Airlines, recently placed an order with Silver Aviation for five cargo planes. Duringcontract negotiations, Bob agreed to a delivery time of 13 weeks (five work days per week) for the first plane, withthe balance of the planes being delivered at the rate of one every four weeks. Because of problems with some of theaircraft that Coastal is currently using, Bob contacted Grace Vander, sales manager for Silver Aviation, to ask about improving the delivery date of the first cargo plane. Grace replied that she believed the schedule could be shortenedby as much as 10 work days or two weeks, but the cost of assembly would increase as a result. Bob said he would be willing to consider the increased costs, and they agreed to meet the following day to review a revised schedule that

Because Silver Aviation previously assembled aircraft on an accelerated basis, the company has a list of "crash

schedule at a minimum increase in cost to Coastal Airlines. Upon completing her plan, she reported to Bob that Silver would be able to cut 10 working days from the schedule for an associated increase in cost of $6,000. Grace's

to develop a plan to cut 10 working days from the

shows accelerated assembly schedule for the cargo plane starting from the regularly scheduled days

Direct Cost Added Crash CostCrash Per Reduced Day

$16,800 $1,200$5,000 $1,400$8,000 $700$6,700 $800$1,400 $0

$11,000 $1,000$8,300 $1,300$7,600 $800$5,200 $500$4,000 $400$4,000 $400

$4,400 $900$82,400

2. Revise the accelerated assembly schedule so that Coastal Airlines will take delivery of the first plane ahead of

3. Calculate the incremental costs that Bob will have to pay for this revised accelerated delivery.

1. Grace Vander's accelerated delivery schedule is unsatisfactory in cutting 10 days from the total project schedule because not all of her crashed activities are included on the Critical Path. In order to reduce the completion time for a project, activities along the critical path need to be chosen to be crashed or reduced. Vander's slection of activities FJ, EF, and BG, which are on the critical path ABGEFJK, will reduce total project completion time only by three days, but her selection of activities HJ, GH, CD, and DE have no impact on the critical path.

2. Below is a revised accelerated delivery schedule that meets both objectives: (1) delivery of the first plane two weeks (10 working days) ahead of schedule, and (2) at the lowest incremental cost to Coastal. All the paths need to be evaluated when reducing a project's completion time. However, the selection of activities to crash should be taken from the critical path first and then the activities should be slected in order according to the smallest crash cost. The critical path now becomes ABCDEFJK and will take 57 days, having only reduced the total project completion date by eight days. Therefore, the activity CD (the next least-costly available activity) needs to be crashed two days, which will then bring all paths to 55 days or

The first path, ABGEFJK, crashed 10 days would cost $10,200, as shown below:

ABGEFJK

65646362605655

The second path, ABCDEFJK, which crashes less expensive activities, is less expensive overall, and thus a bettercrash schedule. The ABCDEFJK path, before crash, has a time of 64, so that the table begins with 64.

ABCDEFJK

646362615755

Note that the activities BG and GE are not crashed in the final solution because they are not on the critical path.

3. The total incremental costs Bob Peterson will have to pay for this revised accelerated delivery schedule amount to $8,300, or a new total project cost of $73,400 from the original $65,100, and a saving of 10

Problem 10-55 Production Planning and Control StrategyBackground

10-55 Requirements

Consider the manufacturing processes observed in ITR's Ontario plant. What recommendations do you think Bryan and Kristen should make?

Solution

Consider the manufacturing processes observed in ITR's Ontario plant. What recommendations do you think Bryan