Question

Question 1) ABC Co. are receiving a new type of product order from one of the valued customers. The customer says that daily demand is pretty large enough that all defect-free parts can be sold. Unfortunately, ABC Co. does not have any press machine which can produce this specific order. The condition is discussed with the customers and they gave a written guarantee to purchase all produced defect-free parts and the purchase price is 14 USD/part. The press machine information received is listed below:

Description	Machine X	Machine Y
Capital Investment	50.000 USD	60.000 USD
Useful Life	10 Years	10 Years
Production Rate	200 parts/hour	260 parts/hour
Hours available for production	9 hours/day	8 hours/day
Percent parts rejected	3%	9%
Material cost/item	6,00 USD	6,00 USD
Operator cost/hour	5USD	5 USD
Monthly working days	26	26
Maintenance Cost	300 USD/month	300 USD/month

1. Which machine should be selected? Please show all your calculations and explain briefly.
2. What would the percent of parts rejected have to be for Machine Y to be as profitable as Machine X? Please show all your calculations.

Answer 1

a.

In order to know which machine should be selected, we first need to calculate the number of units each machine can produce in its life time.

Machine X = 200 X 9 X 26 = 46,800 units
Since the life is same, I am only considering per month units

Machine Y = 260 X 8 X 26 = 54,080 units

	Machine X	Machine Y
Sales	$ 635,544.00	$ 688,979.20
Costs
Material Costs	$ 280,800.00	$ 324,480.00
Operator Costs	$     1,170.00	$     1,040.00
Contribution	$ 353,574.00	$ 363,459.20
Maintenance Cost	$        300.00	$        300.00
Profit per month	$ 353,274.00	$ 363,159.20

Here is the formula version

	Machine X	Machine Y
Sales	=46800*14*97%	=54080*14*91%
Costs
Material Costs	=46800*6	=54080*6
Operator Costs	=9*26*5	=8*26*5
Contribution	=C4-C7-C8	=D4-D7-D8
Maintenance Cost	300	300
Profit per month	=C10-C12	=D10-D12

b.

We need to calculate the rate at which, profit of Machine X = Machine Y

Let rate be D%

(54,080 X 14 X D%) - (54,080 X 6) - (8 X 26 X 5) - 300 = $353,274

When we solve this we get, D% = 10.31%