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Reid & Sanders Operations Management, 8th Edition

Solutions Manual

Solutions Manual Chapter 2: Operations Strategy and Competitiveness 1. Two workers have the job of placing plastic labels on packages before the packages are shipped out. The first worker can place 1,000 labels in 30 minutes. The second worker can place 850 labels in 20 minutes. Which worker is more productive? Answer: Productivity of worker 1 = 1000 labels/30 minutes = 33.3 labels per minute Productivity of worker 2 = 850 labels/20 minutes = 42.5 labels per minute Worker 2 is more productive. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

2. Last week a painter painted four houses in three days. This week she painted six houses in four days. In which week was the painter more productive? Answer: Productivity in worker 1 = 4 houses / 3 days = 1.33 houses per day Productivity in worker 2 = 6 houses / 4 days = 1.5 houses per day The painter was more productive in week 2. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

3. One type of bread-making machine can make six loaves of bread in five hours. A new model of the machine can make four loaves in two hours. Which model is more productive? Answer: Productivity of old model machine = 6 loaves / 5 hours = 1.2 loaves per hour Productivity of new model machine = 4 loaves / 2 hours = 2.0 loaves per hour The new model is more productive. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

4. A company that makes kitchen chairs wants to compare productivity at two of its facilities. At facility #1, five workers produced 225 chairs. At facility #2, six workers produced 263 chairs during the same time period. Which facility was more productive? Answer: Productivity at facility #1 = 225 chairs / 5 workers = 45 chairs per worker Productivity at facility #2 = 263 chairs / 6 workers = 43.8 chairs per worker Facility #1 was more productive. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

5. A painter is considering using a new high-tech paint roller. Yesterday he was able to paint three walls in 45 minutes using his current roller. Today he painted two walls of the same size in 20 minutes. Is the painter more productive using the new paint roller? Answer: Productivity using old method = 3 walls / 45 minutes = 0.07 walls per minute Productivity using new method = 2 walls / 20 minutes = 0.10 walls per minute The painter is more productive using the new paint roller. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

6. Aztec Furnishings makes hand-crafted furniture for sale in its retail stores. The furniture maker has recently installed a new assembly process, including a new sander and polisher. With this new system, production has increased to 95 pieces of furniture per day from the previous 55 pieces of furniture per day. The number of defective items produced has dropped from 8 pieces per day to 2 per day. The production facility operates strictly eight hours per day. Evaluate the change in productivity for Aztec using the new assembly process. Answer: Using only the non-defective production, productivity has increased from (55 – 8) = 47 pieces per day to (95 – 2) = 93 pieces per day. Change in productivity = (93 – 47)/47 × 100% = 97.9% There is a 97.9% increase in productivity using the new assembly process. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

7. Howard Plastics produces plastic containers for use in the food packaging industry. Last year its average monthly production included 20,000 containers produced using one shift five days a week with an eight-hour-a-day operation. Of the items produced 15 percent were deemed defective. Recently, Howard Plastics has implemented new production methods and a new quality improvement program. Its monthly production has increased to 25,000 containers with 9 percent defective. a) Compute productivity ratios for the old and new production system. b) Compare the changes in productivity between the two production systems. Answer: a) Using only the nondetective production, productivity increased from (20,000 × 0.85) = 17,000 units/month to (25,000 × 0.91) = 22,750 units/month. b) Change in productivity = (22,750 – 17,000)/17,000 × 100% = 33.8% There is a 33.8% increase in productivity using the new production method. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 4 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

8. Med-Tech labs is a facility that provides medical tests and evaluations for patients, ranging from analyzing blood samples to performing magnetic resonance imaging (MRI). Average cost to patients is $85 per patient. Labor costs average $18 per patient, materials costs are $22 per patient, and overhead costs are averaged at $20 per patient. a) What is the multifactor productivity ratio for Med-Tech? What does your finding mean? b) If the average lab worker spends four hours for each patient, what is the labor productivity ratio? Answer: a) Multifactor productivity = $85/($18 + $22 + $20) = 1.42 This means that the lab is charging approximately 42% over the expenses of labor, materials, and overhead. b) Labor productivity = $85/4 hours = $21.25 per hour Section: Productivity Subsection: Measuring Productivity LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 4 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

9. Handy-Maid Cleaning Service operates five crews with three workers per crew. Different crews clean a different number of homes per week and spend a differing amount of hours. All the homes cleaned are about the same size. The manager of Handy-Maid is trying to evaluate the productivity of each of the crews. The following data have been collected over the past week. Work Crew Hours Homes Cleaned Anna, Sue, and Tim 35 10 Jim, Jose, and Andy 45 15 Dan, Wendy, and Carry 56 18 Rosie, Chandra, and Seth 30 10 Sherry, Vicky, and Roger 42 18 Assuming the quality of cleaning was consistent between crews, which crew was most productive? Answer: Productivity of Anna, Sue, and Tim = 10 homes/35 hours = 0.29 homes/hour Productivity of Jim, Jose, and Andy = 15 homes/45 hours = 0.33 homes/hour Productivity of Dan, Wendy, and Carry = 18 homes/56 hours = 0.32 homes/hour Productivity of Rosie, Chandra, and Seth = 10 homes/30 hours = 0.33 homes/hour Productivity of Sherry, Vicky, and Roger = 18 homes/42 hours = 0.43 homes/hour The crew of Sherry, Vicky, and Roger was the most productive. Alternative answer: Productivity of Anna, Sue, and Tim = 35 hours/10 homes = 3.5 hours per home Productivity of Jim, Jose, and Andy = 45 hours/15 homes = 3 hours per home Productivity of Dan, Wendy, and Carry = 56 hours/18 homes = 3.1 hours per home Productivity of Rosie, Chandra, and Seth = 30 hours/10 hours = 3 hours per home Productivity of Sherry, Vicky, and Roger = 42 hours/18 hours = 2.3 hours per home The crew of Sherry, Vicky, and Roger was the most productive. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 5 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

10. Two nurses must each visit and attend to patients in the main hospital. The first nurse, on average, can visit 50 patients in an 8-hour day. The second nurse tends to work double shifts, and, on average, cares for 96 patients during the 15 hours she is working. Which nurse is more productive? Answer: Productivity of nurse 1 = 50 patients / 8 hours = 6.25 patients per hour Productivity of nurse 2 = 96 patients / 15 hours = 6.40 patients per hour Nurse 2 is more productive. Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

11. A gallery owner typically sells 10 works of art per month. If she invests in a popup gallery for 14 days in a local mall, she expects to sell 8 works of art. Would she be more productive if she invested in a pop-up gallery presence? Answer: Productivity of traditional gallery = 10 works of art / 30 days = 0.33 works of art per day or approximately one work of art every 3 days. Productivity of pop-up gallery = 8 works of art / 14 days = 0.57 works of art per day or approximately one work of art every 2 days. She would be more productive with the pop-up gallery Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders Operations Management, 8th Edition

Solutions Manual

12. Tech-Ed Source is a company that administers standardized certification tests in the information technology field. Those who pass obtain industry certifications that are important for advancement in their field. Average cost to test-takers is $50 per test. Labor costs for the testing facility averages $10 per test, materials costs are $5 per test-taker, and overhead costs are averaged at $15 per test-taker. a) What is the multifactor productivity ratio for Tech-Ed Source? What does your finding mean? b) If the average facility proctor spends two hours on each test-taker, what is the labor productivity ratio? Answer: a) Multifactor productivity = $50/($10 + $5 + $15) = 1.67 This means that the company is charging approximately 67% over the expenses of labor, materials, and overhead. b) Labor productivity = $50/2 hours = $25 per hour Section: Productivity Subsection: Interpreting Productivity Measures LO: 2.5 Define productivity and identify productivity measures. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

Reid & Sanders, Operations Management, 8th Edition

Solutions Manual

Solutions Manual Chapter 3: Product Design and Process Selection 1. See-Clear Optics is considering producing a new line of eyewear. After considering the costs of raw materials and the cost of some new equipment, the company estimates fixed costs to be $38,000 with a variable cost of $52 per unit produced. a) If the selling price of each new product is set at $90, how many units need to be produced and sold to break even? Use both the graphical and algebraic approaches. b) If the selling price of the product is set at $85 per unit, See-Clear expects to sell 1,800 units. What would be the total contribution to profit from this product at this price? c) See-Clear estimates that if it offers the product at the original target price of $90 per unit, the company will sell about 1,600 units. Will the pricing strategy of $90 per unit or $85 per unit yield a higher contribution to profit? Answer: a) Total Cost = $38,000 + $52Q Total revenue = $90Q Break – even Quantity: Q = Fixed Cost / (Selling Price – Variable Cost) Q = $38,000 / ($90 $52) Q = 1,000, so break – even in exceeded at 1,001 units.

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b) Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $85,(1,800) – [$38,000 + $52(1,800)] $21,400 c) Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $90,(1,600) – [$38,000 + $52(1,600)] $22,800 Selling at $90 per unit is the better alternative, as it yields $1,400 additional revenue. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 4 minutes

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2. Med-First is a medical facility that offers outpatient medical services. The facility is considering offering an additional service, mammography screening tests, on-site. The facility estimates the annual fixed cost of the equipment and skills necessary for the service to be $120,000. Variable costs for each patient processed are estimated at $35 per patient. If the clinic plans to charge $55 for each screening test, how many patients must it process a year in order to break even? Answer: Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $120,000 / ($55 – $35) = 6.000 patients Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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Reid & Sanders, Operations Management, 8th Edition

Solutions Manual

3. Tasty Ice Cream is a year-round take-out ice cream restaurant that is considering offering an additional product, hot chocolate. Considering the additional machine, it would need plus cups and ingredients, it estimates fixed costs to be $250 per year and the variable cost to be $0.30. If it charges $1.50 for each hot chocolate, how many hot chocolates does it need to sell in order to break even? Answer: Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $250 / ($1.50 – $0.30) = 208.33 or 209 hot chocolates Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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Reid & Sanders, Operations Management, 8th Edition

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4. Slick Pads is a company that manufactures laptop notebook computers. The company is considering adding its own line of computer printers as well. It has considered the implications from the marketing and financial perspectives and estimates fixed costs to be $500,000. Variable costs are estimated at $200 per unit produced and sold. a) If the company plans to offer the new printers at a price of $350, how many printers does it have to sell to break even? b) Describe the types of operations considerations that the company needs to consider before making the final decision. Answer: a. Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $500,000/($350  $200) = 3,333.3, so 3,334 printers exceeds the breakeven b. The company needs to consider how the consumers purchasing behavior for laptops influences printer purchasing demand. Other factors to consider relate to the technology of the printers being wireless to support the need for a printer for a laptop. A final consideration is the cost of ink production and sales for the printers. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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5. Perfect Furniture is a manufacturer of kitchen tables and chairs. The company is currently deciding between two new methods for making kitchen tables. The first process is estimated to have a fixed cost of $87,000 and a variable cost of $70 per unit. The second process is estimated to have a fixed cost of $110,000 and a variable cost of $60 per unit. a) Graphically plot the total costs for both methods. Identify which ranges of product volume are best for each method. b) If the company produces 500 tables a year, which method provides a lower total cost? Answer: a) 350000

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Process 1 is lower in total cost when the quantities are fewer than approximately 2,300 tables. Process 2 becomes lower in total cost with quantities higher than approximately 2,300 tables. Solution: $87,000 + $70(Q) = $110,000 + $60(Q) ($70(Q) – $60(Q)) = ($110,000 – $87,000) $10(Q) = $23,000 (Q) = 2,300 units indifference point b) From indifference point: For quantities lower than 2300 units, Process 1 will have a lower total cost. Mathematically: Process 1 has a total cost of $87,000 + 500 × $70 = $122,000  lower total cost Process 2 has a total cost of $110,000 + 500 × $60 = $140,000 Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 5 minutes

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Reid & Sanders, Operations Management, 8th Edition

Solutions Manual

6. Harrison Hotels is considering adding a spa to its current facility to improve its list of amenities. Operating the spa would require a fixed cost of $25,000 a year. Variable cost is estimated at $35 per customer. The hotel wants to break even if 12,000 customers use the spa facility. What should be the price of the spa services? Answer: Break-even Quantity = Fixed Cost / (Selling Price – Variable Cost) rearranges to: Selling Price = (Fixed Cost / Quantity) + Variable Cost = ($25,000/12,000) + $35 = $37.083 Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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Reid & Sanders, Operations Management, 8th Edition

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7. Kaizer Plastics produces a variety of plastic items for packaging and distribution. One item, container #145, has had a low contribution to profits. Last year, 22,000 units of container #145 were produced and sold. The selling price of the container was $18 per unit, with a variable cost of $16 per unit and a fixed cost of $60,000 per year. a) What is the break-even quantity for this product? Use both graphic and algebraic methods to get your answer. b) The company is currently considering ways to improve profitability by either stimulating sales volumes or reducing variable costs. Management believes that sales can be increased by 30 percent of their current level or that variable cost can be reduced to 95 percent of their current level. Assuming all other costs are equal, which alternative would lead to a higher profit contribution? Answer: a) Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $60,000 / ($18  $16) = 30,000 units of product

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b) Increase Sales: 22,000 (1.30) = 28,600 units Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = 28,600($18) – [$60,000 + $16(28,600)] = $2,800 Still losing money, even with more sales. Reduce Variable Costs: 0.95 ($16) = $15.20 Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = 22,000($18) – [$60,000 + $15,20(22,000)] = $1,600 Reducing the variable costs contributes more to profits. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 6 minutes

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8. George Fine, owner of Fine Manufacturing, is considering the introduction of a new product line. George has considered factors such as costs of raw materials, new equipment, and requirements of a new production process. He estimates that the variable costs of each unit produced would be $8 and fixed costs would be $70,000. a) If the selling price is set at $20 each, how many units have to be produced and sold for Fine Manufacturing to break even? Use both graphical and algebraic approaches. b) If the selling price of the product is set at $18 per unit, Fine Manufacturing expects to sell 15,000 units. What would be the total contribution to profit from this product at this price? c) Fine Manufacturing estimates that if it offers the product at the original target price of $20 per unit, the company will sell about 12,000 units. Which pricing strategy—$18 per unit or $20 per unit—will yield a higher contribution to profit? d) Identify additional factors that George Fine should consider in deciding whether to produce and sell the new product. Answer: a) Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $70,000/($20  $8) = 5,833.3 5,834 units have to be produced and sold to break even.

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b) Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $18(15,000) – [$70,000 + $8(15,000)] = $80,000 c) Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $20(12,000) – [$70,000 + $8(12,000)] = $74,000 Setting the price at $18 is more profitable by $6,000. d) Additional factors to consider include the accuracy of the demand forecasts and types of marketing techniques that might effectively promote sales. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 10 minutes ©2023 John Wiley & Sons, Inc. All rights reserved.

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Reid & Sanders, Operations Management, 8th Edition

Solutions Manual

9. Handy-Maid Cleaning Service is considering offering an additional line of services to include professional office cleaning. Annual fixed costs for this additional service are estimated to be $15,000. Variable costs are estimated at $45 per unit of service. If the price of the new service is set at $75 per unit of service, how many units of service are needed for Handy-Maid to break even? Answer: Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $15,000/($75  $45) = 500 units of service Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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Solutions Manual

10. Easy-Tech Software Corporation is evaluating the production of a new software product to compete with the popular word processing software currently available. Annual fixed costs of producing the item are estimated at $150,000, and the variable cost is $10 per unit. The current selling price of the item is $35 per unit, and the annual sales volume is estimated at 50,000 units. a) Easy-Tech is considering adding new equipment that would improve software quality. The negative aspect of this new equipment would be an increase in both fixed and variable costs. Annual fixed costs would increase by $50,000 and variable costs by $3. However, marketing expects the better-quality product to increase demand to 70,000 units. Should Easy-Tech purchase this new equipment and keep the price of their product the same? Explain your reasoning. b) Another option being considered by Easy-Tech is the increase in the selling price to $40 per unit to offset the additional equipment costs. However, this increase would result in a decrease in demand to 40,000 units. Should Easy-Tech increase its selling price if it purchases the new equipment? Explain your reasoning. Answer: a) For current system: Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $35(50,000) – [$150,000 + $10(50,000)] = $1,100,000 Purchase of new equipment: Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $35(70,000) – [$200,000 + $13(70,000)] = $1,340,000 Easy-Tech will have $240,000 more profit with the new equipment. b) Contribution to Profit = Total Revenue – Total Cost SP(Q) – [FC + VC(Q)] = $40(40,000) – [$200,000 + $13(40,000)] = $880,000 Easy-Tech should not consider the price increase as profits will be less than with the existing price. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 7 minutes

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Reid & Sanders, Operations Management, 8th Edition

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11. Zodiac Furniture is considering the production of a new line of metal office chairs. The chairs can be produced in-house using either process A or process B. The chairs can also be purchased from an outside supplier. Specify the levels of demand for each processing alternative given the costs in the table. Process A Process B Outside Supplier

Fixed Cost $25,000 $35,000 $ 0

Variable Cost $35 $20 $45

Answer: Indifference Quantity between Process A and Process B Total Cost A = Total Cost B = [FC + VC(Q)]A = [FC + VC(Q)]B The equation rearranges to: Q = (FCB  FCA)/(VCA  VCB) = ($35,000  $25,000) / ($35  $20) = 666.7 or 667 chairs Process A is better than Process B when demand is below 667 chairs. Indifference Quantity between Process A and Outsourcing Total Cost A = Total Cost O = [FC + VC(Q)]A = [FC + VC(Q)]O Q = $25,000/ ($45 – $35) = 2,500 chairs Process A is better than outsourcing when demand is over 2,500 chairs. Indifference Quantity between Process B and Outsourcing Total Cost B = Total Cost O = [FC + VC(Q)]B = [FC + VC(Q)]O Q = $35,000/ ($45 – $20) = 1,400 chairs. Process B is better than outsourcing when demand is over 1,400 chairs.

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In summation: Demand Ranges 0 to 1,400 1,400 and more

Cheapest Production Outsource Process B

Process A is never the best alternative. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 7 minutes

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12. NewApp Software Production is deciding whether to take on a new, large client, for whom additional hires will need to be made and another workspace will need to be rented. Estimates of the rents and facilities costs per year are $550,000, and the new developers the company must hire cost $75,000 per year, including benefits. One new developer must be hired for each app produced per year. The company estimates that five developers will need to be hired based on initial estimates of the scope of work, which entails five completed apps currently priced at $150,000 each. a) What is the minimum total value of the contract that NewApp must secure in order to break even? Use the algebraic approach. b) How should NewApp price each completed app to ensure a total contribution of $1 million? Answer: a) Break – even Quantity = Fixed Cost / (Selling Price – Variable Cost) = $550,000/($150,000  $75,000) = 7.33 or 8 Apps b) Contribution to Profit = Total Revenue – Total Cost = SP(Q) – [FC + VC(Q)] Contribution to Profit + [FC + VC(Q)] = SP(Q) {Contribution to Profit + [FC + VC(Q)]}/Q = SP = [$1,000,000+ ($550,000 + $75,000×5)] / 5 = $385,000 NewApp must raise the price of each new app to $385,000 to ensure a contribution of $1 million. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 7 minutes

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13. NewApp Software Production, from Problem 12, has decided to produce a new type of app. The app can be made with the current equipment in place. However, the company is considering investing in new software that would allow the developers to produce the app more quickly. The fixed cost would be raised to $650,000 per year, but the variable cost of labor per app would be reduced to $65,000 per app. The company still plans to sell the completed apps at $150,000 each. Should NewApp produce the app with the new or current software described in Problem 12? Specify the volume of demand for which you would choose each process. Answer: It is known from Problem 12, money is lost from this new client if demand is under 7 apps. Given they will proceed: Breakeven Between Old and New Equipment: FCO + VCO(Q) = FCN + VCN(Q) $550,000 + $75,000(Q) = $650,000 + $65,000(Q) $10,000(Q) = $100,000 Q = 10 Use the existing software package if demand is at most 10 apps. Purchase the new software package if demand is over 10 apps. Section: The Product Design Process Subsection: Break-Even Analysis: A Tool for Product Screening LO: 3.3 Use break-even analysis as a tool in deciding between alternative products. Bloom’s: Application AACSB: Analytic Time on task: 7 minutes

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14. Jacob’s Baby Food Company must go through the following steps to make mashed carrots: (1) unload carrots from truck; (2) inspect carrots; (3) weigh carrots; (4) move to storage; (5) wait until needed; (6) move to washer; (7) boil in water; (8) mash carrots; (9) inspect. Draw a process flow diagram for these steps. Answer: Unload Truck  Inspect Carrots  Isolate Damage for Claim  Weigh Good Carrots  Move to Storage  Wait until Carrots are Needed  Move to Washer  Boil in Water  Mash  Inspect for Packaging  Package  Rework or Dispose Section: Designing Processes Subsection: [untitled] Introduction LO: 3.5 Understand how to use a process flowchart. Bloom’s: Application AACSB: Analytic Time on task: 5 minutes

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15. Draw a process flow diagram of your last trip to a fast-food drive-through. Identify bottlenecks. Did any activities occur in parallel? Answer: Enter fast food line  Wait to Order  Order  Wait to Pay  Pay  Wait to receive Food  Receive Food  Depart Bottlenecks occur during the waiting periods. Activities such as pre-preparation of the most popular foods during some of the waiting times or utilizing more than one ordering station may be performed in parallel. Section: Designing Processes Subsection: [untitled] Introduction LO: 3.5 Understand how to use a process flowchart. Bloom’s: Application AACSB: Analytic Time on task: 3 minutes

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16. Oakwood Outpatient Clinic is analyzing its operation in an effort to improve performance. The clinic estimates that a patient spends on average 3.5 hours at the facility. The amount of time the patient is in contact with staff (e.g., physicians, nurses, office staff, lab technicians) is estimated at 40 minutes. On average the facility sees 42 patients per day. Their standard has been 40 patients per day. Determine process velocity and efficiency for the clinic. Answer: Process Velocity = Throughput Time / Value – Added Time = 3.5 / 0.6667 = 5.25 3.5 hours / (convert 40 mins to hours) 3.5 / 0.6667 = 5.25 actual output 42 Efficiency = = = 105% st andard out put 40 Section: Process Performance Metrics Subsection: [untitled] Introduction LO: 3.6 Understand how to use process performance metrics. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

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17. Oakwood Outpatient Clinic rents a magnetic resonance imaging (MRI) machine for 80 hours a month for use on its patients. Last month the machine was used 65 hours out of the month. What was machine utilization? Answer: Utility = Used/Available = (65/80) × 100% = 81.25% or 81% Section: Process Performance Metrics Subsection: [untitled] Introduction LO: 3.6 Understand how to use performance metrics. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

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18. NewApp Software estimates that it takes a full year for each developer to produce one app. However, after a recent process audit, it was discovered that each developer, on average, spends only 25 hours a week directly working on the app. Assume developers work 9 hours a day, 5 days a week, 48 weeks a year. What is the process velocity? Answer: Process Velocity = Throughput Time/Value – Added Time = 9 × 5 × 48/(25 × 48) = 2,160/1,200 = 1.8 Section: Process Performance Metrics Subsection: [untitled] Introduction LO: 3.6 Understand how to use process performance metrics. Bloom’s: Application AACSB: Analytic Time on task: 2 minutes

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Solutions Manual Chapter 4: Supply Chain Management 1. Gabriela Manufacturing must decide whether to insource or outsource a new toxic-free miracle carpet cleaner that works with its Miracle Carpet Cleaning Machine. If it decides to insource the product, the process would incur $250,000 of annual fixed costs and $1.25 per unit of variable costs. If it is outsourced, a supplier has offered to make it for an annual fixed cost of $90,000 and a variable cost of $2.05 per unit in variable costs. a) Given these two alternatives, determine the indifference point (where total costs are equal). b) If the expected demand for the new miracle cleaner is 400,000 units, what would you recommend that Gabriela Manufacturing do? Answer: Indifference Point: Total Cost of Insourcing = Total Cost of Outsourcing Total Cost = FC + VC(Q) a) $250,000 + $1.25(Q) = $90,000 + $2.05(Q) Q = 200,000 units b) Since the demand is expected to be over the indifference point, insourcing is cheaper. The total cost for insourcing would be $750,000 and the total cost for outsourcing would be $910,000. The actual difference may be computed to be $160,000. $250,000 + $1.25(Q) $250,000 + $1.25(400,000) = $750,000 $90,000 + $2.05(Q) $90,000 + $2.05(400,000) = $910,000 $910,000 – $750,000 = $160,000 Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Application AACSB: Analytic Time on task: 10 minutes

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2. Gabriela Manufacturing was able to find a new supplier that would provide the item for $1.50 per unit with an annual fixed cost of $300,000. Should Gabriela Manufacturing insource or outsource the item? Given the expected demand is 400,000 units. Answer: Indifference Point: Total Cost of Insourcing = Total Cost of Outsourcing Total Cost = FC + VC(Q) The variable cost from a new supplier is $1.50. The new outsourced fixed cost is $300,000. $300,000 + $1.50(Q) > $250,000 + $1.25(Q) $300,000 + $1.50(400,000) > $250,000 + $1.25(400,000) $900,000 > $750,000 Since the fixed cost and variable cost are both more expensive than insourcing, it would be a better choice to insource the work. However, consideration would be the cost, relevancy, and reliability of the raw materials, equipment, and labor as that can tend to shift. These considerations may be a reason to outsource. Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Application AACSB: Analytic Time on task: 10 minutes

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3. Downhill Boards (DB), a producer of snow boards, is evaluating a new process for applying the finish to its snow boards. Durable Finish Company (DFC) has offered to apply the finish for $160,000 in fixed costs and a unit variable cost of $0.60. Downhill Boards currently incurs a fixed annual cost of $135,000 and has a variable cost of $0.95 per unit. Annual demand for the snow boards is 170,000. a) Calculate the annual cost of the current process used at Downhill Boards. b) Calculate the annual cost if Durable Finish Company applies the finish. c) Find the indifference point for these two alternatives. d) How much of a change in demand is needed to justify outsourcing the process? Answer: a) Total Cost = FC + VC(Q) = $135,000 + $0.95(170,000) = $296,500 b) Total Cost from Durable = $160,000 + $0.60(170,000) = $262,000 c) Indifference point: Total Cost of Insourcing = Total Cost of Outsourcing $135,000 + $0.95(Q) = $160,000 + $0.60(Q) Q = 71,429 snow boards (rounded) ($135,000 – $135,000) + ($0.95(Q) – $0.60(Q)) = ($160,000 – $135,000) + ($0.60(Q) – $0.60(Q)) 0.35(Q) = $25,000 Q = $25,000 / $0.35 = 71,428.57 OR 71,429 d) Since demand is 170,000, which is greater than the indifference point of 71,429 snow boards, then outsourcing is the cheaper process. Demand would need to fall by 58 percent to justify bringing the snowboard production process in-house. Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Analysis AACSB: Analytic Time on task: 10 minutes

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4. Fast Finish Inc. (FFI) has made a technological breakthrough in snow board finish application. FFI will apply the finish for $0.23 per unit in variable costs plus a fixed annual cost of $230,000. Use the cost and demand information given in Problem 3 for Downhill Boards to evaluate this proposal. a) What will it cost Downhill Boards to outsource the finishing process? b) At what demand level does it make sense economically to outsource the finishing process? c) What additional factors should be considered when making this outsourcing decision? Answer: a) Using the current demand of 170,000 units: Total Cost from FFI = $230,000 + $0.23(Q) = $269,100 Therefore, it will save Downhill Boards $296,500 – $269,100 = $27,400 if they outsource the finishing process. The demand from the previous question was 170,000 $230,000 + $0.23 (170,000) $230,000 + $39,100 = $269,100 b) Indifference point: Total Cost of Insourcing = Total Cost of Outsourcing $135,000 + $0.95(Q) = $230,000 + $0.23(Q) Q = 131,944.4 Therefore, it is better to outsource when demand is 131,945 or more. c) Additional factors that need to be considered when making this outsourcing decision include the economic stability of FFI, the technical ability of FFI to produce a quality product, the ability of FFI to “partner,” the ability of FFI to deliver on time, and the impact of outsourcing on remaining employees. Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Analysis AACSB: Analytic Time on task: 10 minutes

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5. Henri of Henri’s French Cuisine (HFC), a chain of 12 restaurants, is trying to decide if it makes sense to outsource the purchasing function. Currently, Henri employs two buyers at an annual fixed cost of $100,000. Henri estimates that the variable cost of each purchase order placed is $18. Value-Buy (VB), a group of purchasing specialists, will perform the purchasing function for a fixed annual fee of $120,000 plus $5.50 for each purchase order placed. Last year, HFC placed 1,575 purchase orders. a) What was the cost last year to HFC when doing the purchasing in-house? b) What would the cost have been last year had HFC used Value-Buy? c) What is the indifference point for the two alternatives? d) If HFC estimates it will place 1,700 purchase orders next year, should it use VB? e) What additional factors should be considered by HFC? Answer: a) Total Cost Last Year = FC + VC(Q) = $100,000 + $18(1,575) = $128,350 b) Total Cost from VB = $120,000 + $5.50(1,575) = $128,662.50 c) Indifference point: Total Cost of Insourcing = Total Cost of Outsourcing $100,000 + $18(Q) = $120,000 + $5.50(Q) Q = 1,600 orders d) Yes, VB is a cheaper alternative whenever demand exceeds 1,600 orders, so a volume of 1,700 orders would be cheaper with VB. e) Additional factors that should be considered include the economic stability of VB, the ability of VB to manage quality, the ability of VB to “partner,” the ability of VB to deliver on time, the lead time and quantity order requirements of VB, and the impact of outsourcing on remaining employees. Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Analysis AACSB: Analytic Time on task: 15 minutes

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6. Cal’s Carpentry is considering outsourcing its accounts receivable function. Currently, Cal employs two full-time clerks and one part-time clerk to manage accounts receivable. Each full-time clerk has an annual salary of $36,000 plus fringe benefits costing an additional 30 percent of their salary. The part-time clerk makes $18,000 per year and has no fringe benefits. Total salary plus fringe cost is $111,600. Cal estimates that each account receivable incurs a $10 variable cost. The Small Business Accounts Receivables Group (SBARG) specializes in handling accounts receivable for small- to medium-size companies. Doris Roberts from SBARG has offered to do the accounts receivable for Cal’s Carpentry at a fixed cost of $75,000 per year plus $30 per account receivable. Next year, Cal expects to have 2,000 accounts receivable. a) Calculate the cost for Cal’s Carpentry to continue doing accounts receivable in-house. b) Calculate the cost for Cal’s Carpentry to use SBARG to handle the accounts receivable. c) If the fixed annual cost offered by SBARG is nonnegotiable but it is willing to negotiate the variable cost, what variable cost from SBARG would make Cal indifferent to the two options? d) What other alternatives might Cal consider in terms of his current staffing for accounts receivable? e) What additional criteria should Cal consider before outsourcing the accounts receivable? Answer: a) Total Cost = FC + VC(Q) = $111,600 + $10(2,000) = $131,600 b) Total cost for SBARG = $75,000 + $30(2,000) = $135,000 c) $111,600 + $10(2,000) = $75,000 + VC(2,000) = $28.30 d) Cal might investigate if he could do more with part time employees or if the variable costs could be reduced from the existing $10. 5 part-time ($18,000) = $90,000 $111,600 – $90,000 = $21,600 saved e) Before outsourcing the accounts receivable, Cal should consider the following:  How stable is the future of SBARG?  How good is the estimated 2,000 accounts receivable?  How reliable is SBARG compared to his own staff? Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Analysis AACSB: Analytic Time on task: 20 minutes

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7. A U.S.-based device manufacturer is considering outsourcing production of the specialty batteries that power its home medical devices. The fixed costs related to the battery production are $275,000 per year and $0.50 in variable costs. A nearby battery manufacturer has offered to make the batteries for an annual fixed cost of $150,000 and a variable cost of $0.80 per unit in variable costs. a) Given these two alternatives, determine the indifference point (where total costs are equal). b) If the expected demand for the home medical device is 300,000 units, what would you recommend that the device manufacturer do? Answer: Indifference Point: Total Cost of Insourcing = Total Cost of Outsourcing Total Cost = FC + VC(Q) a) $275,000 + $0.50(Q) = $150,000 + $0.80(Q) Q = 416,667 units (rounded) ($275,000 – $150,000) + ($0.50(Q) – $0.50(Q)) = ($150,000 – $150,000) + ($0.80(Q) – $0.50(Q)) 0.30(Q) = $125,000 Q = $125,000 / $0.30 = 416,666.66666667 OR 416,667 b) Since the demand is expected to be under the indifference point, outsourcing is cheaper. If sales equal demand, the total cost for insourcing would be $425,000 and the total cost for outsourcing would be $390,000. The actual difference may be computed to be $35,000. Section: Sourcing Decisions Subsection: Insourcing versus Outsourcing Decisions LO: 4.4 Illustrate how sourcing decisions are made. Bloom’s: Application AACSB: Analytic Time on task: 10 minutes

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