ma task 2.2 + 2.3

I. Reduce Costs and Enhance Value

The output from a manufacturing process is 3.6 tonnes per productive hour. The product is sold

for $110 per tonne. Costs of production include:

Direct materials $45 per tonne of materials input

Process wages $4,700 per week (for a normal working week of 37 hours)

Rework $70 per week

Repairs to machinery $950 per week

10% of materials input are currently lost in the process and some of the output has to be

reworked in another department, at times as a result of customer complaints. On average, six

hours per week are being lost due to breakdown of machinery leaving only 31 productive hours.

Sales are being lost as a consequence.

Investment in new machinery is not feasible at the present time but, with a view to improving the

current situation, management has undertaken a value analysis exercise and is introducing

quality control and assurance procedures. As a consequence of this, it is now expected that

output tonnage can be increased from 90% of materials input to 92% and that the need for

rework can be eliminated.

Additional Information:

1

The factory manager has suggested that a system of routine preventative maintenance be

considered. This would take the form of a maintenance team, working outside normal working

hours. This could be either on a night shift or by Saturday working.

Incremental costs would be incurred on the routine maintenance team but reductions would be

expected in: (i) Machine breakdown time with a corresponding increase in productive time; (ii)

Machine repair costs; The table below summarises the forecast effect of the introduction of

routine preventative maintenance.

Routine preventative maintenance

Night shift Saturday working

Maintenance team:

Incremental cost per week £1,200 £600

Machine breakdown time 75% saving 40% saving

Machine repair costs reduced to £350 per week reduced by 40%

• Use performance indicators to identify potential improvements (2.2)

Guide: You may calculate performance indicators as follows:

Performance indicators Calculations Current valueMaterials input loss percentage

Total materials input loss / Total materials input Total material input=

Total material output/(100%-10%) =3.6/0.9=4

Total input loss= Total input – Total output = 4-3.6= 0.4

10%

2

Productive hour loss percentage

Productive hour loss / Total normal working hours= (37-31)/37

16.22%

Output tonnage to Materials input

Output tonnage / Materials input Output tonnage

=31x3.6=111.6 tonnages Materials input = 31x4=

124 tonnages

90%

Total failure cost percentage Total failure cost / Total cost Total failure cost = Total

material input cost loss + Rework + Repairs to machinery = (£45x0.4x31) + £70 + £950 = £558+ £70 + £950 = £1,578

Total cost = Direct Material input cost + Process wages cost + Rework cost + Repairs to machines cost = (£45x4x31)+ £4,700+ £70+ £950=£11,300

13.96%

Total failure cost to Total sales

Total failure cost / Total sales Total failure cost =

£1,578 Total sales = £110 x 3.6

x 31= £ 12,276

12.85%

… (you should think about other Performance indicators different from the above suggested ones)

After calculations, you should make comments on the results of the Performance indicators. For

example, The Materials input loss percentage which is currently 10% is quite high, the company

should do …. and do… to save the materials cost much more. (Read Activity 5, page 104 about

how can wastage be reduced)

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Also, read textbook part 4. Reducing costs and Adding value (page 103) (and also in my slides)

to make good recommendations.

II. Improvements to reduce costs, enhance value and quality

(Hints: Calculate the cost of direct materials per week in the current situation; Calculate the cost

of direct materials per tonne of output: if output tonnage is increased to 92% of materials input.

Calculate the increase in weekly profit that will be expected to result from the improvement in

materials efficiency and the elimination of product rework.

Recommend whether routine preventative maintenance should be introduced, and if so whether

on a night shift or by Saturday working. Assume: No change to the current levels of material

wastage or rework; Process wages remain at $4,700 per week; Additional output can be sold.)

Guide: You may provide schedules as follows:

TOTAL COST OF MATERIALS INPUT PER WEEK

Cost per tonne of materials input £45.00

Productive hours 31 hours

Output tonnage per productive hour 3.6 tonnes

Materials input loss rate 10%

Materials Input per productive hour 4 tonnes

Total materials input per week 124 tonnes

Total cost of materials input £5,580

DIRECT MATERIALS COST PER TONNE OF OUTPUT

4

Before After*

Total cost of materials input £5,580 £5,704

Output tonage rate 90% 92%

Total Output tonage 111.6 tonnes 114.08 tonnes

Direct materials cost £5,022 £5,133.6

per tonne of output

Before: Total materials output 3.6 tonnes

Productive hour 31 hours

Direct material per input tonnage £ 45

Direct materials cost per tonne of output £ 5,022

After: Total materials output 3.68 tonnes

Productive hour 31 hours

Direct material per input tonnage £ 45

Direct materials cost per tonne of output £ 5,133.6

Profit per week is included revenue and expense. As you can see on the table of direct materials cost per unit of output, it shows that the total output tonnage changes (from 111.6 tonnes to 114.08 tonnes) when output tonnage rate change (from 90% to 92%), so that it sells more to customers and revenue of factory is increased

o Difference of total output tonnage

Total output tonnage after introducing 114.08 tonnes

Total output tonnage before introducing 111.6 tonnes

Difference of total output tonnage 2.48 tonnes

o Increase on revenue

Difference of total output tonnage 2.48 tonnes

Selling price £110

5

Increase on revenue £272.8

Expense included direct material, process wages, rework and repairs to machinery. About direct material, it is not changed because it has the same production materials such as input and output. Base on the fact of process wages, it remains at £4700 per week, so that it is not changed and repair to machinery also is not changed. As a consequence of this, it is now expected that output tonnage can be increased from 90% of materials input to 92% and that the need for rework can be eliminated.Furthermore, it has not rework because factory has system of routine preventative maintenance that it is quality control system to improve production process, so that factory will not pay any cost for rework that it makes more profit to factory.

o Increase on profit weekly

Increase on revenue £272.8

Rework £ 70

Increase on profit weekly £ 342.8

* After introducing quality control and assurance procedures

ROUTINE PREVENTATIVE MAINTENANCE


Maintenance team:

Incremental cost per week £1,200 £600


Machine repair costs reduced to £350.00 per week 40% reduction

Productive hour loss 1.5 hours 3.6 hours

Machine breakdown time saving 4.5 hours 2.4 hours

Additional output tonnage (3.6 127.8 tonnes 120.24 tonnes

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tonne/hour)

Now (90%) Night Shift Saturday working

Output tonnage 111.6 tonnes 127.8 tonnes 120.24 tonnes

Direct materials input 124 tonnes 142 tonnes 133.6 tonnes

Direct materials input cost £5580 £6390 £6012

Total cost £11300 £11510 £11352

Total failure cost £1578 £1659 £1261.2

Rework £950 £350 £570

Addition

Night Shift Saturday working

Output tonnage 16.2 tonnes 8.64 tonnes

Direct materials input 18 tonnes 9.6 tonnes

Direct materials input cost £810 £432

Total cost £210 £52

Total failure cost £81 £43.2

Rework £600 £380


Total cost of materials input £5580 £6390 £6012

Process wages £4700 £4700 £4700

Rework £70 £70 £70

Repairs to machinery £ 950 £350 £570

Incremental cost per week £ 1200 £ 600

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Total expense £ 11300 £ 12710 £ 11952


Total output tonnage 111.6 tonnes 127.8 tonnes 120.24 tonnes

Selling price £ 110 £ 110 £ 110

Sales revenue £ 12276 £ 14058 £ 13226.4


Sales revenue £12276 £14058 £13226.4

Total expense £11300 £12710 £11952

Profit per week £976 £1348 £1274.4

After calculating profit per week, the finger shows that the factory manager has suggested that a system of routine preventative maintenance in night shift (£1348) because night shift earned more profit per week than Saturday working (£73.6).

* After introducing quality control and assurance procedures

For the 2nd requirement, you can choose to one of the following 2 ways of comparison between Night Shift and Saturday working

Method 1 - Compare the differences between the two options



Maintenance team:

Incremental cost per week £1,200.00 £600.00

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Machine repair costs reduced to £350.00 per week 40%reduction

Productive hour loss

Machine breakdown time saving

Additional output tonnage (3.6 tonne/hour)

-Additional output leads to what?

Add: -What costs and how much saving?

Less: -What costs and how much increased? (additional costs)

-

Additional profit

Then, you should compare between:

- Current status (Before Routine preventative maintenance)

- Night shift

- Saturday working

To suggest one option for the company.

OR Method 2 - Compare the differences in Total profit between the three options

(see next page)


NOW Night shift Saturday working

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Total Output tonage xxx xxx xxx

Selling price xxx xxx xxx

Sales revenue xxx xxx xxx

Total cost of materials input xxx xxx xxx

…(please specify more expenses)

…

…

xxx xxx xxx

Profit per week xxx xxx xxx

Then, you should compare between:

- Current status (Before Routine preventative maintenance)

- Night shift

- Saturday working

To suggest one option for the company.

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ma task 2.2 + 2.3

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