ANSWER FOR ASSIGNMENT QUESTIONS

Question 16.2

Typical costs for the overseas subcontractor and the U.S. shoe company that sells a name brand shoe to a retail chain might be:

Overseas subcontractor

            Labor per shoe                                                2.75

            Materials                                                         9.00

            Shipping and import duty                                 3.50

            Operating cost                                                3.00

            Profit                                                              1.75

U.S. brand name shoe company

            Purchase from subcontractor               20.00

            Research and development                    0.25

            Promotion and advertising                     4.00

            Sales, G&A                                          5.00

            Profit                                                    6.75

Question 16.3

This is an example of a break-even point problem.  Soft tooling typically makes the part with standard machines, universal dies and fixtures, and sometimes with tooling made quickly from softer materials like aluminum. A process developed with soft tooling can get under way quickly, making parts with little automation and low tooling cost. However the life of the tools is short and the cost of making a unit part is higher than if more time and money were spent making hard tool steel dies using highly automated manufacturing equipment. Soft tooling works best when the number of parts, Q , is relatively small; hard tooling works best when the quantity of parts needed is large. The objective of this problem is to find the break-even quantity of parts Q_B below which soft tooling is the way to go, and above which using hard tooling is a better decision.

            At the break-even point, Q_B, the cost of using hard tooling equals the cost of using soft tooling. The chief cost elements are:

·         the cost of tooling.

 C_H = $7500     C_S = $600

·         the cost of tool setup.

 S_H=$60           S_S = $100           Parts are made in batches, b, (lots) of 500 units.

·         the cost to make one part.

 C_pH = $0.80     C_pS = $3.40

At the break-even point,

The break-even point gives the total production at which the hard tooling approach becomes more cost effective than soft tooling. Since the total production is 5000 units, the best decision is to use hard tooling if the time required to make to tools and prepare the production machines is compatible with the product development schedule.

The units for the basic equation above are:

Question 16.4

Figure 16.1 should serve as a guide for breaking down the costs listed in the problem statement.

Prime cost

Direct labor                                                     950,000

Direct material                                                2,150,000

Direct expenses                                               60,000

Direct engineering                                           90,000

Direct engr. expenses                                       30,000

                                                                        3,280,000        …………..…(1)

Factory expense

Plant utilities                                                   70,000

Plant & equip. depreciation                            120,000

Warehouse expense                                        60,000

Taxes & insurance                                             50,000

                                                                              300,000………………….(2)

General and administrative expenses (G&A)

Plant manager and staff                      180,000

Administrative salaries                        120,000

Office utilities                                       10,000

                                                                                    310,000………….(3)

Manufacturing cost = (1) + (2) +(3) = 3,890,000 (4)

Sales  expense = 100,000………………(5)

Total cost = (4) + (5) = 3,990,000……………(6)

 This ignores corporate overhead, which should be small for a company of this size.

The problem states that the profit margin is 0.15 or 15%. One is tempted to multiply the total cost by 0.15 to get the profit, and add this to cost to find the selling price.

However, this is not strictly correct. By definition: