Question

An automobile manufacturer is considering one of two systems for its windshield assembly line. The first is a robotic system that should save money due to a reduction in labor and material cost. This robotic system will cost $400,000. Current practice is to recover this cost over the first two years. One full-time technician and one full-time material handler will be needed with this system. The full-time technician costs $60,000 per year and the material handler costs $52,000 per year.

If the company selects the manual system, it will need four full-time material handlers at a cost of $52,000 each per year. If the manual system is selected, the company will incur additional costs of $0.50 per windshield installed. (Hint: This is the savings referred to in the first paragraph.)

Q.1) Suppose that the company is going to produce 9,000 windshields per month. How much would the robotic design have to save per unit in order for the company to be indifferent between the two design options?

Q.2) For the manual design and with the current price of $9.50 per unit, the marketing group has said that there is a demand for 8,000 units per month. However, if the company were to drop the price by $0.25 per unit and adopt the robotic design, the demand would increase to 9,000 units per month. The other information for the robotic design is provided in a) above. Looking at these two options, which strategy should the company adopt? All of the other information provided in part a) applies in this analysis. Show your work supporting your decision.

Answer 1

Answer 1

Robotic System,

Initial Cost of Robotic system=$400000

Operational cost = 60000+52000=$112000

Let the saving per unit be x, total savings from 9000 units = 9000*12*x=$108000x

Total cost over 2 years = 400000+112000*2-108000x = 400000+224000-108000x=624000-108000x

Manual System,

Manpower cost per year=4*52000=$208000

Variable cost per year= 0.5*9000*12 = $54000

Total cost per year = 208000+54000=$262000

Total cost for 2 year = 262000*2=$524000

to be indifferent total cost should be equal, hence, 624000-108000x=524000

or, 108000x=624000-524000

or, 108000x=100000

or, x =100000/108000 = $0.93

Hence Savings per unit shall be $0.93

Answer 2

Sale Price for 9000 units = 9.5-0.25 = $9.25

Total Revenue =9.25*9000*12=$999000

Total Cost of Robotic system = 624000-108000*0.93=624000-100440 = $523560

Total Profit in case of Robotic system = 999000-523560=$475440

Total Cost of Manual system = $524000

Total Profit in case of Manual system = 999000-524000=$475000

Since the Profit in case of Robotic system is more, it should be adopted