Question

A novelty coffee mug manufacturer produces 5 different designs that are sold at tourist information kiosks. The demand requirements for the coming tourist season is as follows:

Design	A	B	C	D	E
Demand (units)	500	750	600	800	450

The mugs can all be produced in the same workstations, but require different processing and setup times. The production information is in the following table:

Design	A	B	C	D	E
Batch Size (units)	50	50	50	50	50
Setup Time (hr/batch)	2	2	2.50	4	1.50
Processing Time (hr/unit)	0.15	0.15	0.25	0.25	0.10

The company wants to produce all the required mugs in one four-week period. It currently operates workstations that work 8 hours per day, 5 days per week, with a capacity cushion of 20%.

(1) How many workstations are needed to meet the production requirements?

(2) Operating each workstation costs the company $25/hour for a total of $1,000 per week (including the capacity cushion). Calculate the total operating cost to produce the mugs.

(3) Each workstation costs $2,500 to purchase and commission. If the company acquires the extra number of workstations indicated in part (1), what would be the cost of production?

(4) If the company has other contracts it needs to satisfy. Working on the mugs more than 4 weeks means it will have to cancel another contract, incurring a penalty of $4,500. What should the company do: cancel the contract or buy the required workstations?

Answer 1

Please refer to the solution below.