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 Current Profit New target cost (to meet competitve price) 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. $548.60 $61.40 $487.20

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 Seconds per unit

252,000 sec 30 sec

2. The processing line is not properly balanced. Operation 2 exceeds takt time by 4 sec. and Operation 3s 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 accountants 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
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 A10 model and $595 for the A25 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 A10 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?

Solution 1 and 2: Activity-based Costs A-10 Direct Materials Materials Handling Mfg Supervision Assembly Set-ups Inspection and Test Packaging Total Price Margin

A-25

A-10

A25

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.

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 Oceanfront room; number of nights Meals: Breakfasts Lunches Dinners Scuba diving trips Water skiing trips Airfare (round trip from Miami) Transportation to and from airport Cancun $180 $35 $49 $60 $60 $50 $200 $15 $649 Jamaica $120 $25 $35 $0 $30 $20 $355 $10 $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

1. 2. 3. 4. 5.

The price, contribution, and profit information is as follows. $176.183 = $3,410,000 X 1.55 / 30,000 $184.60 = $4,260,000 X 1.3 / 30,000 $189.444 = $113.67 / (1 - .4) $189.333 = $142.00 / (1 - .25) $202.00 = $142.00 X (! + .4225) Where: .4225 = ($12,000,000X.15) / (30,000X$142
30,000 $2,500,000 $1,760,000 $3,410,000 $4,260,000 $113.67 $142.00 ANSWER TO PART 6. Contribution Margin $ 2,785,500 3,038,000 252,500 3,183,333 3,180,000 3,560,000

Annual volume (units) = Total variable costs = Total fixed costs = Total mfg costs = Total life-cycle cost = Per-unit manufacturing cost = Per-unit life-cycle cost =

Method: Markup on full manufacturing cost Markup on life cycle costs Price to Achieve Desired GM % Price to Achieve Desired LCC % Price to Achieve Desired ROA of

Desired Rate for Markup 55% $ 30% $ 40% $ 25% $ 15% 42.25% $

Price 176.183 184.600 189.444 189.333 202.000

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

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 charge per rental in order for the business to make a 20 percent life-cycle return on investment? Target Life-Cycle ROI Annual rentals Solution 20.00% 6,400

10-36 Requirements
Activities and Market Characteristics Decline in sales Advertising Boost in production Stabilized profits Competitors entrance into market Market Research Market Saturation Start Production Product Testing Termination of Product Large Increase in sales Life Cycle Stage Decline Introduction Growth Maturity Growth Introduction Maturity Introduction Introduction Decline Growth

10-37 Requirements Evaluate the compensation plan for this contract, with the fixed fee of 10 percent and the incentive fee 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 explanation of 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 Aint 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 Criteria Comfort Enjoyment

Taste Relative importance of criteria The % contribution of each component to each customer criterion: Menu and food prep Wait staff Food ingredients Total

Importance Index

Fifth: Compare Relative Importance to Relative Cost for Each Component Importance Index Relative Cost

Components Menu and food prep Wait staff Food ingredients Total

Ratio

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 $150 $75 $75 $24 $15 $70 $320 $729 $81 11% ICU 900 $450 $75 $120 $56 $30 $110 $520 $1,361 $159 12%

Video cameras Video monitors Motion detectors Floodlights Alarms Wiring (ft) Installation (hrs) TOTAL Profit Profit Margin 2. Recalculated profit margins: Revised selling prices per unit (given) = Total cost per unit (part 1 above) = Profit, per unit = Profit margin percentage =

$750 $729 $21 2.80%

$1,390 $1,361 $29 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 Total Cost

$225 $1,425

$175 $1,210

$50 $215

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

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

b) Morrow appears to compete in what Robin Cooper calls the "confrontation" strategy (When Lean Collide, Harvard Business School Press, 1995), wherein each competitor must simultaneously co the basis of price, quality, and functionality. In Morrow's case, functionality refers not onloy to me specifications, but also to "delighting" the customer with meeting delivery times, reducing lead tim minimizing billing and shipping errors, as Morrow has done. In a "confrontation" type of competitio costing is particularly valuable, as Cooper points out, because it provides the firm a mechanism fo and choosing the proper "bundle" of the three aspects of competition: price, quality, and funcation example, to be most competitive, Morrow must spend extra dollars to ensure that there are few if shipping errors, while at the same time reducing the cost of manufacturing the product, and main improving product quality.

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

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 reengineerin the warehousing processes. What is the maximum cost (i.e., the target cost) for warehousing activities if the fi desires to earn the same amount of profit nex year? Solution

New number of purchase orders decrease in shipping costs

700 5

Current Year Operating Income Sales ($20 x 100,000) = Costs: Purchase ($10 x 100,000) Purchasing order (150 x $1,000) Warehousing ($30 x 8,000) Distributing ($80 x 500) Fixed operating cost Operating income Determination of Target Cost: Sales ($20.00 x 100,000 x 0.90) Desired profit (given) Costs: Purchase Purchasing order Distributing Fixed operating cost Maximum allowable costs for warehousing

$2,000,000 $1,000,000 $150,000 $240,000 $40,000 250,000

$1,680,000 $320,000

$1,800,000 $320,000 $980,000 $105,000 $37,500 250,000

$1,372,500 $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 Safety Styling Performance Comfort

Customer Rating 33% 15% 20% 32% 100% Safety 33% 9.90% 9.90% 3.30% 6.60% 3.30% Styling 15% 6.00% 3.00% 1.50% 1.50% 3.00% Performance 20% 10.00% 4.00% 6.00% 0.00% 0.00% Comfort 32% 9.60% 3.20% 3.20% 0.00% 16.00%

Criteria Value Components: Hull and keel Standing rig Sails Electrical Other

Value Index Component: Hull and keel Standing rig Sails Electrical Other 35.50% 20.10% 14.00% 8.10% 22.30% 100.00%

Cost Index 30.00% 15.00% 17.00% 13.00% 25.00% 100.00% Ratio 1.18 1.34 0.82 0.62 0.89 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 First PEC-1 Second PEC-2 Demand Price Materials Cost

Time Req'd for Each Product Activity First Name Receiving

Time Available

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 First Table Second Sofa Demand 400 150 Price $250.00 $450.00 Materials Cost $100.00 $250.00 Time (hrs.) Available 280 280 700 280 140

Activity First Second Third Fourth Fifth

Name Cut Sand Assemble Stain Cut fabric

Time Req'd for Each Product Table Sofa 0.50 0.20 0.50 0.50 0.75 1.50 0.80 0.30 0.00 0.80

(2 x 35 x 4) (2 x 35 x 4) (given) (2 x 35 x 4) (1 x 35 x 4)

Part One: Identify the Constraint Total Time Required for Each activity for Given Deman Table 200 200 300 320 0 Sofa 30 75 225 45 120 Total Time 230 275 525 365 120 Time Available 280 280 700 280 140 Slack Time 50 5 ### ##### ######### 20

Cut Sand Assemble Stain Cut fabric

Part Two: Identify Most Profitable Product Table Price $250 Materials Cost $100 Throughput Margin $150 Constraint time 0.80 Throughput/hour $187.50 Part Three: Identify Most Profitable Product Mix

Sofa $450 $250 $200 0.30 $666.67

Since sofas are the most profitable product through the staining constraint, we fill the sofa demand first, and then with the remaining staining capacity we fill as much of the table demand as possible. Table Demand Production of Sofas Availabiliy, Usage of Staining hours Production of Tables Throughput/hour (see above) Total Throughput 400 235 293 $187.50 $54,938 Sofa 150 150 45 $666.67 $100,000

280

$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 Activity First Second Third Fourth Fifth Products First Second Name Filtering Stripper Reactor Final Filter Mixing Name Polymer 1 Polymer 2 Time Required for each Product Polymer 1 Polymer 2 2 4 2 3 3 4 2 1 3 3 Demand 60 40 Price 145 185 Variable cost 45 60 Time Available 320 320 320 160 320

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 2 3 1,000 400 2,000 3,400 3,000 (400) 500 400 2,000 2,900 3,100 200 1,000 0 1,000 2,000 2,700 700

Product 611 613 615 TOTAL available excess (deficiency)

4 1,000 800 1,000 2,800 3,300 500

2. The best product mix is 400 units of Product 613, 500 units of product 611, and 800 units of product 615. 611 613 Price $196 $123 Variable Cost* $103 $73 Throughput/unit $93 $50 Machine hours in Dept 1 2 1 Throughput/hour $46.50 $50.00 * For example, variable cost for 611 = $(7 + 12 + 21 + 24 + 9 + 27 + 3) Production/sales plan: Total hours available in Department 1 = First priority--Product 613 (400 units x 1 hr/unit) = Second priority--Product 611 (500 units x 2 hrs/unit) = Balance--Product 615 (all remaining hours, up to product demand) = Hours 3,000 400 1,000 1,600 615 $167 $97 $70 2 $35.00

Units 400 500 800

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 Sales Cost of goods sold Gross profit Research and development Selling expenses Profit before taxes The life-cycle product line profitability analysis shows a much different result. Yderm Total

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 Revenues Costs R&D Prototypes Marketing Distribution Manufacturing Customer Serivce Total Cost Operating Profit L50 Revenues Costs R&D Prototypes Marketing Distribution Manufacturing Customer Serivce Total Cost Operating Profit 2005 $ 800 1,400 350 60 60 20 $1,890 ($1,090) 2005 $ 900 650 300 124 170 85 $1,329 ($429) 49% 23% 9% 13% 6% 74% 19% 3% 3% 1% 2006 2,300 50 600 120 770 60 $1,600 $700 2006 1,900 30 200 200 700 20 $1,150 $750 0% 3% 17% 17% 61% 2% 0% 3% 38% 8% 48% 4% 2007 3,100 0% 0% 23% 6% 66% 4% Total 6,200 1,400 400 1,135 310 2,140 145 $5,530 $670 Total 5,000 650 340 584 780 1,556 320 $4,229 $771 15% 8% 14% 18% 37% 8% 25% 7% 21% 6% 39% 3%

475 130 1,350 85 $2,040 $1,060 2007 2,200 10 260 410 770 300 $1,750 $450

$ 0% 1% 15% 23% 44% 17%

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 = Each year, for five coming years = Sunk costs: R&D = Clinical trials = 10-53 Requirements Determine the best option for Cure-All. Support your answer.

$300,000,000 $25,000,000 $1,000,000 $2,108,000

Solution Life-Cycle Costs IF CURE ALL MANUFACTURES IF CURE ALL OUTSOURCES Revenues Costs: R&D Clinical trials Manufacturing fixed variable Packaging fixed variable Distribution fixed variable Advertising fixed variable Total Cost Operating Income

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

3.

assumed discount rate = Year PV factor, year no. 1 0.909090909 2 0.826446281 3 0.751314801 4 0.683013455 5 0.620921323 PV annuity factor = 3.790786769

10.00%

Problem 10-54 Constraint Analysis, Flow Diagrams

Background

Silver Aviation assembles small aircraft for commercial use. The majority of its business is airlines serving areas whose airports do not accommodate larger planes. The remainder o are commuter airlines and individuals who use plnes in their businesses, such as the own Silver recently expanded its market into Central and South America, and the company exp over the next three years.

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

Because Silver Aviation previously assembled aircraft on an accelerated basis, the compa costs" for this purpose. Grace used the data shown in Exhibit 2 to develop a plan to cut 1 schedule at a minimum increase in cost to Coastal Airlines. Upon completing her plan, she Silver would be able to cut 10 working days from the schedule for an associated increase Exhibit 3 shows accelerated assembly schedule for the cargo plane starting from the regu and cost.

Exhibit 2 Expected Acitivity Times Regular Crash Fame fusalage 20 16 Wing placement 6 5 Engine mount 9 7 Landing gear 7 5 Cargo doors 3 3 Electical wiring 15 13 Instrument panel 8 6 Electrical tests 11 10 Exterior shell 9 7 Interior finish 8 7 Exterior paint 6 5 Final testing 3 2 Direct Cost Regular $12,000 $3,600 $6,600 $5,100 $1,400 $9,000 $5,700 $6,800 $4,200 $3,600 $3,600 $3,500 $65,100

Activity AB BC CD DE BE BG GE EF GH FJ HJ JK

Exhibit 3 Accelerated Plane Assembly Activity Crashed HJ by one day FJ by one day GH by two days CD by two days EF by one day DE by two days BG by one day 10-54 Requirements Total Add'l Cost/Day Direct Cost $65,100 $400 $65,500 $400 $65,900 $500 $66,900 $700 $68,300 $800 $69,100 $800 $70,700 $1,000 $71,700 No. of Days 1 1 2 2 1 2 1

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

Solution

1. Grace Vander's accelerated delivery schedule is unsatisfactory in cutting 10 days from because not all of her crashed activities are included on the Critical Path. In order to red a project, activities along the critical path need to be chosen to be crashed or reduced. FJ, EF, and BG, which are on the critical path ABGEFJK, will reduce total project comp 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 two weeks (10 working days) ahead of schedule, and (2) at the lowest incremental cost paths need to be evaluated when reducing a project's completion time. However, the se to crash should be taken from the critical path first and then the activities should be slec according to the smallest crash cost. The critical path now becomes ABCDEFJK and w having only reduced the total project completion date by eight days. Therefore, the activ least-costly available activity) needs to be crashed two days, which will then bring all pa less. The first path, ABGEFJK, crashed 10 days would cost $10,200, as shown below: Activity Crashed START FJ EF JK BG AB GE Total Days Reduced Incremental Cost per day $400 800 900 1,000 1,200 1,300 Incremental Cost $400 800 900 2,000 4,800 1,300 $10,200

1 1 1 2 4 1

The second path, ABCDEFJK, which crashes less expensive activities, is less expensive o crash schedule. The ABCDEFJK path, before crash, has a time of 64, so that the table be

Activity Crashed START FJ EF JK AB CD Total

Days Reduced

Incremental Cost per day $400 800 900 1,200 700

Incremental Cost $400 800 900 4,800 1,400 $8,300

1 1 1 4 2

Note that the activities BG and GE are not crashed in the final solution because they are n 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 d amount to $8,300, or a new total project cost of $73,400 from the original $65,100, and days.

majority of its business is with small freight r planes. The remainder of Silver's customers inesses, such as the ownders of larger ranches. ica, and the company expects to double its sales

am. The diagram for the assembly of a single cargo paths with the critical path being ABDEFJK. Bob with Silver Aviation for five cargo planes. During (five work days per week) for the first plane, with y four weeks. Because of problems with some of the der, sales manager for Silver Aviation, to ask about d that she believed the schedule could be shortened mbly would increase as a result. Bob said he would be the following day to review a revised schedule that

elerated basis, the company has a list of "crash to develop a plan to cut 10 working days from the n completing her plan, she reported to Bob that r an associated increase in cost of $6,000. Grace's ane starting from the regularly scheduled days

Direct Cost Crash $16,800 $5,000 $8,000 $6,700 $1,400 $11,000 $8,300 $7,600 $5,200 $4,000 $4,000 $4,400 $82,400

Added Crash Cost Per Reduced Day $1,200 $1,400 $700 $800 $0 $1,000 $1,300 $800 $500 $400 $400 $900

lines will take delivery of the first plane ahead of

his revised accelerated delivery.

y in cutting 10 days from the total project schedule ritical Path. In order to reduce the completion time for o be crashed or reduced. Vander's slection of activities reduce total project completion time only by three days, pact on the critical path.

oth objectives: (1) delivery of the first plane e lowest incremental cost to Coastal. All the ion time. However, the selection of activities e activities should be slected in order comes ABCDEFJK and will take 57 days, days. Therefore, the activity CD (the next which will then bring all paths to 55 days or

as shown below: ABGEFJK 65 64 63 62 60 56 55

ivities, is less expensive overall, and thus a better of 64, so that the table begins with 64.

ABCDEFJK 64 63 62 61 57 55

olution because they are not on the critical path.

his revised accelerated delivery schedule the original $65,100, and a saving of 10

Problem 10-55 Production Planning and Control Strategy

Background

10-55 Requirements

Consider the manufacturing processes observed in ITR's Ontario plant. What recommend and Kristen should make? Solution

plant. What recommendations do you think Bryan