Week 2 HW
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Roanoke College *
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Industrial Engineering
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Dec 6, 2023
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13-20 See spreadsheet.
13-23 See spreadsheet.
13-45 Theory of Constraints; Strategy Colton Furniture Co. is a small but fast-growing manufacturer of living room furniture. Its two principal
products are end tables and sofas. The flow diagram for the manufacturing at Colton follows. Colton’s
manufacturing involves five processes: cutting the lumber, cutting the fabric, sanding, staining, and
assembly. One employee cuts fabric and two do the staining. These are relatively skilled workers who
could be replaced only with some difficulty. Two workers cut the lumber, and two others perform the
sanding operation. There is some skill to these operations, but these skills are less critical than those for
staining and fabric cutting. Assembly requires the lowest skill level, and there is currently a total of 175
hours of working time per week provided by a single full-time employee plus some part-timers. The
other employees work a 40-hour week, with 5 hours off for breaks, training, and personal time. Assume
a 4-week month and that, by prior agreement, none of the employees can be switched from one task to
another. The current demand for Colton’s products and sales prices are as follows, although Colton
expects demand to increase significantly in the coming months if it is able to successfully negotiate an
order from a motel chain. Required
1.
Which of the activities is the constraint?
See spreadsheet
2.
Using the constraint identified in requirement 1, calculate the throughput margin per hour for
each product.
See spreadsheet
3.
Given the results to requirements 1 and 2, how many of each product should be produced?
See spreadsheet
4.
How would you apply steps 3 through 5 of the theory of constraints to Colton’s manufacturing
operations? What would you recommend for each step?
5.
For step 3, I would recommend performing a Takt time study for Colton’s to understand
how much time should ideally be spent on each process to optimize overall production. Without
even performing an analysis, it’s already clear that too much personnel is concentrated in the
assembly step. Slack hours are equal to a whole week of working time.
In step 4, is where the company should look at reducing spending on part-time
employees and replacing them with a full-time employee in the staining process. Since staining is
a skilled process, automation would likely be out of consideration in the short-term, but the
company can review less skilled areas that can be automated and possibly free up labor to move
to the constraint.
In step 5, the company should perform a total review of the process to identify areas of
optimization. They can either look at additional training to improve employee skills and reduce
work time, consider additional areas for automation or adding advanced machinery, and possibly
redesigning the products for ease of production.
13-48 Life-Cycle Costing Kate Stephens, the COO of BioDerm, has asked her cost management team for a product-line
profitability analysis for her firm’s two products, Xderm and Yderm. The two skin care products require a
large amount of research and development and advertising. After receiving the following statement from
BioDerm’s accountants, Kate concludes that Xderm is the more profitable product and that perhaps cost-
cutting measures should be applied to Yderm:
Required
1.
Explain why Kate may be wrong in her assessment of the relative performance of the two
products.
Kate’s initial conclusion does not take into consideration the distribution of R&D costs
and selling expenses for each product. Without applying these costs, it cannot be definitively
known which product yields a higher profit before taxes.
2.
Suppose that 75 percent of the R&D and selling expenses are traceable to Xderm. Using this
assumption, compute the life-cycle income for each product and the return on sales for each
product.
See spreadsheet
3.
Consider your answers to requirements 1 and 2 with the following additional information:
R&D and selling expenses are substantially higher for Xderm because it is a new product. Kate
has strongly supported development of the new product, including the high selling and R&D
expenses. She has assured senior managers that the Xderm investment will pay off in
improved profits for the firm. What are the ethical issues, if any, facing Kate as she reports to
top management on the profitability of the firm’s two products?
4.
As Kate has advocated for increased spending on the new product, she will feel
incentivized to report favorable profits to maintain a good impression with top management and
possibly greater compensation. If Kate reports on Xderm being the more profitable product and
advocates for cost-cutting measures to be applied to Yderm, then she would be violating the IMA
ethical standards of competence, integrity, and credibility. Failing to gain all relevant cost
information would mean providing reports and recommendations that are inaccurate. As already
mentioned, taking such actions would be an unethical move to ensure Kate’s own personal gains
and, if discovered, would discredit her role. And finally, this information would be neither fair
nor objective, and would greatly influence management’s interpretation of the situation.
17-47 Quality Cost Classification
Required
Classify each of the following costs into one of the four quality cost (i.e., COQ) categories:
1.
Materials, labor, and overhead costs of scrapped units.
Internal failure
2.
Engineering time spent to determine the causes of failures to meet product specification.
Internal failure
3.
Wages and salaries for the time spent by workers to gather quality measurements.
Appraisal
4.
Information systems costs expended to develop data requirements.
Appraisal
5.
Clerical staff expenses to coordinate training programs.
Prevention
6.
Salaries for members of problem-solving teams.
Prevention
7.
Payment to settle a product-liability lawsuit
.
External failure
17-68 Relevant Costs and Quality Improvement Lightening Bulk Company is a moving company specializing in transporting large items worldwide. The
firm has an 85% on-time delivery rate. Thirteen percent of the items are misplaced and the remaining
2% are lost in shipping. On average, the firm incurs an additional $65 per item to track down and deliver
misplaced items. Lost items cost the firm about $300 per item. Last year, the firm shipped 6,000 items
with an average freight bill of $200 per item shipped.
The firm’s manager is considering investing in a new scheduling and tracking system costing $125,000
per year. The new system is expected to reduce misplaced items to 1% and lost items to 0.5%.
Furthermore, the firm expects total sales to increase by 10% with the improved service. The average
contribution margin ratio on any increased sales volume, after cost savings associated with a reduction in
misplaced and lost items, is expected to be 37.5%.
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Required
1.
Based on a relevant cost analysis, should the firm install the new tracking system? That is,
what is the estimated change in pretax cash flow under the proposed system? Show
calculations and round answer to the nearest whole dollar.
See calculations in spreadsheet. Yes, the decrease in cost from reducing misplaced and
lost items alone ($215,310) will exceed the yearly cost of installing and maintaining the new
system.
2.
What other factors does the firm’s manager need to consider in making the decision?
The manager will need to consider factors such as: training costs for the new system,
less time spent tracking missing/lost items frees up capacity for additional order fulfillment,
improved fulfillment metrics can lead to improved business reputation and greater sales.
3.
Upon further investigation, the manager discovered that 80% of the misplaced or lost items
either originated in or were delivered to the same country. What is the maximum amount (to
the nearest whole dollar) the firm should spend to reduce the cost of problems in that country
by 90%?
See spreadsheet
17-70 Cost of Quality (COQ) Analysis; Nonfinancial Performance Measures Acme Materials Company manufactures and sells synthetic coatings that can withstand high
temperatures. Its primary customers are aviation manufacturers and maintenance companies. The
following table contains financial information pertaining to COQ in 2022 and 2023 (in thousands of
dollars):
Required
1.
Classify the cost items in the table into COQ categories.
See spreadsheet
2.
Calculate the ratio of each COQ category to revenues in each of the 2 years. (Round all answers
to 2 decimal places.)
See spreadsheet
3.
Comment on the results. In conjunction with answering this question, calculate and refer to
the following results:
a.
Percentage change (to 2 decimal places) in total COQ as a percentage of sales, from
2022 to 2023.
Total COQ saw a 40% percent decrease as a percentage of sales from 2022 to
2023. This shows that the company’s increased spending in prevention costs has had a
significant positive impact on their overall quality spending.
b.
Total COQ in 2023 expressed as a percentage (to 2 decimal places) of 2022 sales
dollars.
Even in comparison to the lower sales dollars earned in 2022, the 2023 COQ
show a significant improvement. Where 2022 COQ calculate as 22% of total 2022 sales
dollars, the 2023 COQ compare as only 13% of total 2022 sales dollars. This shows that
the quality improvements that the company has invested in will increase the company’s
profit margin as sales continue to grow.
c.
Percentage change in total prevention costs (to 2 decimal places), 2022 to 2023.
Prevention costs show a percentage change increase of 141%. The company has
invested heavily in preventive measures such as employee training, preventive
maintenance, vendor certification, and design engineering. As mentioned earlier, these
prevention investments are showing to have a significant impact on the company’s
overall cost spending.
d.
Percentage change in total appraisal costs (to 2 decimal places), 2022 to 2023.
The company has been able to reduce their appraisal costs by over 50%. With
their investments in vendor certifying and product engineering, the company has had to
spend less in appraisals activities such as materials and product inspections. Additionally,
through their engineering and training expenditures, they have likely been able to
redesign processes for better efficiencies, as we can see through the reduction of labor
costs. e.
Percentage change in total internal failure costs (to 2 decimal places), 2022 to 2023.
The savings and efficiencies in their appraisal activities also seem to pash
through to the internal failures. Less money is being spent on scrap materials and
reworking costs. The investments in preventive equipment maintenance has also led to
less emergency repairs and maintenance.
f.
Percentage change in total external failure costs (to 2 decimal places), 2022 to 2023.
External failures have also seen a percentage change reduction of over 50%. This
mostly stems from decreased spending in warranty repairs, product returns, and liability
settlements. Though warranty repairs have decreased, they are still significantly higher
than all other external failure costs. It would likely benefit the company to reinvest in
final product inspections to bring warranty repairs in line with other external failures.
4.
In addition to the financial measures listed in the table, what nonfinancial measures might
Acme monitor in its effort to achieve overall improvements in quality?
As the company tends to work with aviation companies, safety metrics would be of high
importance to monitor. They should measure for factors such as number of defects per product
batch, percentage of sales returned, customer complaints, number of liability lawsuits, etc. They
can also look for productivity metrics such as, machine downtime and time between order
receipt to product shipment.
5.
Are financial or nonfinancial quality measures likely of more use to (a) managers or (b)
operating personnel? Why?
6.
Managers will likely find financial measures of greater use as their decisions tend to be
based on cost measures and fulfilling the financial objectives of top executives. Operating
personnel can make better use of nonfinancial measures. As they spend more of their day-to-day
working within the process, they are better able to see which components of production are
affecting or affected by these measures and can make recommendations for improvement.
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