Question

PA 4-8 (Algo) Atlas Inc. is a toy bicycle manufacturing... Atlas Inc. is a toy bicycle manufacturing company producing a five-inch small version of the bike that Lance Armstrong rode to win his first Tour de France. The assembly line at Atlas Inc. consists of seven work stations, each performing a single step. Stations and processing times are summarized here:

Step 1 (35 sec.): The plastic tube for the frame is cut to size.

Step 2 (20 sec.): The tube is put together.

Step 3 (40 sec.): The frame is glued together

Step 4 (25 sec.): The frame is cleaned.

Step 5 (35 sec.): Paint is sprayed onto the frame.

Step 6 (45 sec.): Wheels are assembled.

Step 7 (45 sec.): All other parts are assembled to the frame. Under the current process layout, workers are allocated to the stations as shown here:

Worker 1: Steps 1 and 2

Worker 2: Steps 3 and 4

Worker 3: Step 5

Worker 4: Step 6

Worker 5: Step 7 Assume the workers are paid $20 per hour. Each bicycle is sold for $5 and includes parts that are sourced for $1. The company has fixed costs of $100 per hour. Despite Lance Armstrong’s doping confession, there exists substantially more demand for the bicycle than Atlas can supply.

a. what is the cost of direct labor for the bicycle? _____ per unit

b. how much profit does the company make per hour? _______ per hour

c. what would be the profits per hour if Atlas would be able to source the parts 8 percent cheaper ($.92 for the parts one of unit?) ______ per hour

d. what would be the profits per hour if Atlas were able to reduce fixed costs by 12 percent (to $88 per hour) ______ per hour

e. what would be the profit per hour if Atlas were able to reduce the processing time at the bottleneck by 6 seconds per unit (assume unlimited demand)? ____ per hour

Answer 1

a)

Worker 1 time = 35+20 = 55 sec

Worker 2 time = 40+25 = 65 sec

Worker 3 time = 35 sec

Worker 4 time = 45 sec

Worker 5 time = 45 sec

Worker 2 time is the highest processing time. Therefore, it is the bottleneck station.

Cycle time = Bottleneck time = 65 sec

Output rate = 3600/65 = 55.3856 units per hour

Total cost of direct labor per hour = 5*20 = 100 per hour

Cost of direct labor per bicycle = Total cost of direct labor per hour / Output rate

Cost of direct labor per bicycle = 100/55.3856

Cost of direct labor per bicycle = 1.81 per unit

b)

Total cost per hour = Labor cost + Parts cost + Fixed cost

Total cost per hour = 100+55.3856*1+100

Total cost per hour = 255.3856

Total revenue per hour = 55.3856*5

Total revenue per hour = 276.928

Total profit per hour = 276.928-255.3856

Total profit per hour = 21.54

c)

Updated total cost per hour = Labor cost + Parts cost + Fixed cost

Updated total cost per hour = 100+55.3856*0.92+100

Updated total cost per hour = 250.9548

Total profit per hour = 276.928-250.9548

Total profit per hour = 25.97 per hour

d)

Updated total cost per hour = Labor cost + Parts cost + Fixed cost

Updated total cost per hour = 100+55.3856*1+88

Updated total cost per hour = 243.3856

Total profit per hour = 276.928-243.3856

Total profit per hour = 33.54 per hour

e)

New Bottleneck time 59 sec

New cycle time = 592 sec

New output rate = 3600/59 = 61.02 bicycles per hour

Total cost per hour = Labor cost + Parts cost + Fixed cost

Total cost per hour = 100+61.02*1+100

Total cost per hour = 261.02

Total revenue per hour = 61.02*5

Total revenue per hour = 305.10

Total profit per hour = 305.10-261.02

Total profit per hour = 44.08 per hour