Question

Ron Reagan, an assembly worker at Republican Iron Works, has been timed performing four work elements, with the results in the below table. The allowances for tasks are personal, 8%; stretch, 10%; and delay 3%.

Task	perfomance%	obser
	rating	1	2	3	4	5
1	105	.5	.3	.6	.4	.4
2	96	.7	.8	.7	.6	.7
3	90	.6	.4	.7	.5	.6
4	75	1.5	1.6	2.0	1.7	1.5

A. WHAT IS THE NORMAL TIME?

B. WHAT IS THE STANDARD TIME?

C. A product is currently made in a process-focused shop, where fixed costs are $12,000 per year and variable cost is $45 per unit. The firm currently sells 225 units of the product at $100 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $18,000 per year and variable costs = $10 per unit. If a price of $70 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain. Show the profit and breakeven point in units and sales dollars for each option

Answer 1

Please refer to below table for necessary calculations :

		O B S E R V A T I O N S
Task	Performance rating (%)	1	2	3	4	5	Average time	Normal time	Standard time
1	105	0.5	0.3	0.6	0.4	0.4	0.44	0.462	0.559
2	96	0.7	0.8	0.7	0.6	0.7	0.7	0.672	0.813
3	90	0.6	0.4	0.7	0.5	0.6	0.56	0.504	0.610
4	75	1.5	1.6	2	1.7	1.5	1.66	1.245	1.506
							SUM =	2.883	3.488

Following to be noted :

Average time = Sum of 4 observations /4

Normal time = Average time x Performance rating ( %) /100

Standard time = Normal time x ( 1 + Standard allowance factor /100)

Standard allowance factor

= Personal allowance : 8% + Stretch allowance : 10% + Delay allowance : 3 % = 21%

Thus Normal time of the process

= Sum of Normal time of 4 tasks

=2.883

Standard time of the process = sum of Standard time of 4 tasks = 3.488

NORMAL TIME = 2.883

STANDARD TIME = 3.488

Answer to question C :

Profit under current process

= Price / unit x Units sold – Fixed cost – Variable cost / unit x Units sold

= 225 x 100 – 12000 – 225 x 45

= 22500 – 12000 – 10125

= $375

Let breakeven quantity for above process = N1 . At breakeven point, profit = 0

Therefore,

100.N1 – 12000 – 45.N1 = 0

Or, 55.N1 = 12000

Or, N1 = 12000/55

Or, N1 = 218.18 ( 218 ROUNDED TO NEAREST WHOLE NUMBER )

Profit under NEW process

= Price / unit x Units sold – Fixed cost – Variable cost / unit x Units sold

= 400 X 70 – 18000 – 400 X 10

= 28000 – 18000 - 4000

= $6000

Let breakeven quantity for above process = N2 . At breakeven point, profit = 0

Therefore,

70.N2 – 18000 – 10.N2 = 0

Or, 60.N2 = 18000

Or, N2 = 18000/60

Or, N2 = 300

Since profit under new process $6000 > Profit under current process i.e. $375, the Manager will change the process