Question

Your company produces electronic connectors, which consist of a metal strip with multiple prongs assembled into a plastic housing. The manufacturing process is divided into four separate departments: 1) Injection molding, where the small plastic housings are produced; 2) Stamping, where the steel strips are punched out of thin coils of steel; 3) Plating, where the steel strips, after being stamped, are plated with tin or gold; and 4) Assembly, where the plated strips are inserted into the plastic housing.

The injection molding machines together have the capacity to produce 4000 plastic housing per hour. The firm's stamping presses can punch out 3000 steel strips per hour. The plating department has two dedicated lines—one for tin-plating and the other for the slower gold-plating process. The tin-plating line has a capacity of 2000 units per hour; the gold-plating line has a capacity of 500 units per hour. In the assembly department, there are six automated assembly machines, each with the capacity to assemble 400 connectors per hour.

Assume that machines never break down, and assume that there is sufficient plastic and steel raw material so that raw material availability never constrains the process. Assume that the plant is only running the tin-plated product—the gold-plating line is completely idle.

1) Assume that hourly demand during work hours for tin-plated connectors is 2200 units/hr and demand for gold-plated connectors is 600 units/hr, and that both processes are active. The plant runs for 8 hours/day, 5 days/week, 50 weeks/yr. Both connector types earn a margin of $0.10 apiece. The plant is considering investing in an additional automated assembly machine, which costs $400,000. What is the payback period for this investment (in years)?

Answer 1

Identification of bottleneck department:

As per the analysis of the case there is no capacity constraint from Injection molding department (4000 units per hour) and Stamping department (3000 units per hour). The only bottleneck is plating department (2500 units per hour).

Plating:

Given that the actual hourly demand for tin – plated connectors      = 2200 units / hr

Actual demand for gold-plated connectors                                        = 600 units / hr

Total demand to be produced and assembled                                   = 2600 units/hr

But as per the information given in the case:

The capacity of tin-plating line                                                           = 2000 units per hour

The gold-plating line has a capacity                                                  = 500 units per hour

Total quantity can be produced and assembled as per capacity = 2500 units per hour

Assembly:

No of machines available for assembly departments (old) = 6 machines

No of machines purchased for assembly departments (new) = 1 machines

Total machines available in assembly department                             = 7 machines

Capacity of each machine as per information given = 400 units / hr

No of connectors can be assembled per hour                                    = 2800 units / hr

Calculation of return from additional machine: Since plating department has capacity constraint with respective to meet the demand.

Maximum output to be produced from plating = 2500 units / hr

Load on old machines of Assembly department = 2400 units / hr

Load on new machine purchased                                                        = 100 units / hr

Margin from output produced by new machine = 100 units / hr * $ 0.10

                                                                                                             = $10 per hour

Margin from new machine per year                                                      = $10 per hour * 8 hrs per day * 5          days per weeks * 50 weeks per year

                                                                                                             = $ 20,000 per year

Investment in additional machine                                                         = $ 400,000

Payback period                                                                                     = value of investment / Return per year

                                                                                                             = $ 400,000 / $ 20,000

                                                                                                             = 20 years

The payback period of investment in new machine if worked as per capacity constraints is 20 years

Suggestion: If the company satisfies the demand by increasing the capacity of the plating department.

Calculation of return from additional machine:

Maximum output demand to be satisfied by plating    = 2800 units / hr

Load on old machines of Assembly department = 2400 units / h

Load on new machine purchased                                                        = 400 units / hr

Margin from output produced by new machine = 400 units / hr * $ 0.10

                                                                                                             = $40 per hour

Margin from new machine per year                                                      = $40 per hour * 8 hrs per day * 5          days per weeks * 50 weeks per year

                                                                                                             = $ 80,000 per year

Investment in additional machine                                                         = $ 400,000

Payback period                                                                                     = value of investment / Return per year

                                                                                                             = $ 400,000 / $ 80,000

                                                                                                             = 5 years

If the company satisfies the existing demand of total 2800 units per hour the payback period is 5 years.

It has to take measures to increase the capacity of bottleneck resource i.e., plating department.

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