Homework 6

(Key)

Chapter 7 in the text book, Problems: 10, 15, 12, 17, 24, 25
7-10. The purchase price of a natural gas-fired commercial boiler (capacity X) was
$181,000 eight years ago. Another boiler of the same basic design, except with capacity
1.42X, is being considered to purchase. If it is purchased, some optional features
presently costing $28,000 would be added for your application. If the cost index was 162
for this type of equipment when the capacity X boiler was purchased, and is 221 now,
and the applicable cost capacity factor is 0.8, what is your estimate of the purchase price
for the new boiler?

Let CA = cost of new boiler SA = 1.42 X

CB = cost of new boiler SB = X

CA = $181,000 *(221/162) = $246,920

CB = $246,920 *(1.42 X/X) 0.8 = $326,879

Total cost with options = $326,879 + $28,000 =$354,879

7-15. A 250-ft2 shell and tube heat exchanger was purchased for $13,500 in 1989 when
the index value was 830. Estimate the cost of a 150-ft2 shell and tube heat exchanger in
2001 when the index value is 964 and the appropriate cost capacity factor is 0.6.

C2001 (250 ft2) = $13,500*(964/830) = $15,680

C2001 (150 ft2) = $15,680*(150/250) 0.6 = $11,541

7-12. If an ammonia plant that produces 500,000 pounds per year cost $2,500,000 to
construct eight years ago, what would a 1,500,000-pound-per year plant cost now?
Suppose that the construction cost index has increased an average rate of 12% per year of
the past eight years and that the cost-capacity factor (X) to reflect the economy of scale is
0.65.

CB (8 years ago) = $2,500,000 CB (now) = 2,500,000*(1.12) 8 = $6,189,908

SA = 1,500,000 lbs/yr SB = 500,000 lbs/yr
X = 0.65

CA = CB (SA/SB) X = $6,189,908*(1,500,000/500,000) 0.65 = $12,641,919

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7-17. The standard labor hours per output unit for Product A were based on a time study
of the thirty-second unit. If the learning curve, based on previous experience with similar
products, is 85%, (a) what was the number of hours required for the first unit and (b)
what is the estimated number of hours needed for the 1,000th output unit?

Z32 = 8.74 hours; s = 0.85 (85% learning curve); n = (log 0.85)/(log 2) = -

0.2345

(a) Z32 = K*(32) 0.2345 = 8.74 K = (8.74)/(32)-0.2345 = 19.7 hours

(b) Z1000 = 19.7*(1000) 0.2345 = 3.9 hours

7-24. You have been asked to estimate the per unit selling price of a new line of widgets.
Pertinent data are as follows:
Direct labor rate $15.00 per hour
Production material $375 per 100 widgets
Factory overhead 125% of direct labor
Packing costs 75% of direct labor
Desired profit 20% of total manufacturing cost

Past experience has shown that an 80% learning curve applies to the labor required for
producing widgets. The time to complete the first widget has been estimated to be 1.76
hours. Use the estimated time to complete the 50th widget as your as your standard time
for the purpose of estimating the unit selling price.

The estimate of direct labor hours is based on the time to produce the 50th
unit.
K = 1.76 hours
s = 0.8 (80% learning curve)
n = (log 0.8)/(log 2) = -0.322
Z50 = 1.76*(50)-0.322 = 0.5 hours
Factory Labor = ($15/hr)*(0.5 hr/widget) = $7.50 / widget
Production Material = $375 / 100 widgets = $3.75 / widget
Factory Overhead = (1.25)*($7.50 / widget) = $9.375 / widget
Packing Cost = (0.75)*($7.50 / widget) = $5.625 / widget
Total Manufacturing Cost = $26.25 / widget
Desired Profit = (0.20)*($26.25 / widget) = $5.25 / widget
Unit Selling Price = 31.50 / widget

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7-25. A personal computer company is trying to bring a new model of PC (Pentium
Plus) to the market. According to the marketing department, the best selling price for a
similar model from a world-class competitor is $2,500 per computer. The company wants
to sell at the same price as its best competitor. The cost breakdown of the new model is
shown below:

Assembling time for the 1st unit: 1.00 hr

Handling time: 10% of Assembling Time
Direct labor rate: $15/hr
Planning labor: 10% of Direct Labor
Quality Control: 50% of Direct Labor
Factory Overhead: 200% of Total Labor
General & Administrative expense: 300% of Total Labor
Direct material cost: $200/per computer
Outside manufacture: $2000/per computer
Packing cost: 10% of Total Labor
Facility rental: 10% of Total Labor
Profit: 20% of Total Manufacturing Cost
Number of Units: 20,000

Since the company mainly produces sub-assemblies purchased from other manufacturers
and repackages the product, the direct material cost is estimated at only $200 per
computer. Direct labor time consists of handling time and assembling time. The company
estimates the learning curve for assembling the new model is 95%.

How can the company reduce its cost to meet the best competitors price?

Before examining potential cost reductions, the current manufacturing cost

must be estimated.

Total Direct Labor Time = Assembly Time + Handling Time

A 95% learning curve applies to the assembly time

K = 1 hr, s = 0.95, n = log 0.95 / log2 = -0.074

20000
Time to assemble all 20,000 units = (1)S1 (u)-0.074

T20,000 = 10,378.26 hours

Adding in handling time as 10% of assembly time

Total Factory (direct) Labor = (10,378.26)*(1.1) = 11,416.09 hours

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Using the table (from the book), the total manufacturing cost and selling
price are $2,284.94 and $2,741.92 respectively.

MANUFACTURING COST ELEMENTS Unit Estimate

Units Cost/ Units Factor of Row Row Total
A. Factory Labor 11416.09 $15.00 $171,241.35
B. Planning Labor 10% A 17,124.14
C. Quality Control 50% A 85,620.68
D. TOTAL LABOR $273,986.17
E. Factory Overhead 200% D 547,972.32
F. General & Admin. Expense 300% D 821,958.48
G. Production Material 20000 $200.00 4,000,000
H. Outside Manufacture 20000 $2,000.00 40,000,000
I. SUBTOTAL 45,643,916.97
J. Packaging Costs 10% D 27,398.62
K. TOTAL DIRECT CHARGE 45,671,315.59
L. Other Direct Charge
M. Facility Rental 10% D 27,398.62
N. TOYAL MANUFACTURING COST 45,698,714.21
O. Quantity (lot size) 20000
P. MANUFACTURING COST/ UNIT 2,284.94
Q. Profit/ Fee 20% P 456.99
R. UNIT SELLING PRICE 2,741.93

Given the competitors selling price of $2,500 and assuming a desired return
on sales of 20%, the target cost is given by:

Target Cost = (1 0.2)*($2,500) = $2,000

It will be difficult for the company to assemble the computer for less than
$2,000. The estimated outside manufacturing cost alone is $2,000 per
computer. This cost should be reduced if the target cost of $2000 is to be
achieved.

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As shown in the following table, the cost of $2,00 can be reached if the
outside manufacturing cost can be reduced to 1,715 (a 14.25 reduction).

MANUFACTURING COST ELEMENTS Unit Estimate

Units Cost/ Units Factor of Row Row Total
A. Factory Labor 11416.09 $15.00 $171,241.35
B. Planning Labor 10% A 17,124.14
C. Quality Control 50% A 85,620.68
D. TOTAL LABOR $273,986.17
E. Factory Overhead 200% D 547,972.32
F. General & Admin. Expense 300% D 821,958.48
G. Production Material 20000 $200.00 4,000,000
H. Outside Manufacture 20000 $1,715.06 34,301,286
I. SUBTOTAL 39,945,202.78
J. Packaging Costs 10% D 27,398.62
K. TOTAL DIRECT CHARGE 39,972,601.40
L. Other Direct Charge
M. Facility Rental 10% D 27,398.62
N. TOYAL MANUFACTURING COST 40,000,000.02
O. Quantity (lot size) 20000
P. MANUFACTURING COST/ UNIT 2,000.00
Q. Profit/ Fee 20% P 400
R. UNIT SELLING PRICE 2,400.00