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Operations Management

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Process Selection: Volume Drives Costs and Profits COB 300C Busing – PowerPoint PPT presentation

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Title: Operations Management


1
Process Selection Volume Drives Costs and
Profits
COB 300C Busing
2
Process Selection
  • Process selection includes
  • Technical issuesbasic technology used to produce
    a service or good
  • Volume or scale decisionusing the proper amount
    of mechanization to leverage the organizations
    work force

Work Force
MECHANIZATION
Transparency 8.1
3
Product Design, Process Selection, and Capacity
Decisions
Transparency 8.2
(Exhibit 8.1)
4
Volume Drives Costs (Slide 1 of 3)
  • Quick-as-a-Blink Printing Center needs to invest
    in equipment to bind books. Management could
    purchase manual or automatic binding equipment.
  • Annual
    Variable
  • Fixed Labor
    Production
  • Machine Cost
    Cost Rate
  • Manual 1,000
    18/hr 10 units/hr
  • Automatic 9,000
    2/hr 100units/hr
  • The total-cost equation is as follows
  • TC FC (VC) (Xp)

Transparency 8.3a
5
Volume Drives Costs (Slide 2 of 3)
  • Manual
  • TC 1,000 (1,000 units)
  • 2,800
  • Unit Cost
  • 2.80 per unit at volume 1,000

18/hr
10 units/hr
2,800
1,000
Transparency 8.3b
6
Volume Drives Costs (Slide 3 of 3)
  • Automatic
  • TC 9,000 (1,000
    units)
  • 9,020
  • Unit cost
  • 9.02 per unit at volume of 1,000

2/hr
100 units/hr
9,020
1,000
Transparency 8.3c
7
Power of Volume to Reduce Costs
  • Volume Manual
    Automatic
  • /unit
    /unit
  • 1,000 2.80
    9.02
  • 10,000 1.90
    .92
  • 100,000 1.81
    .11

Transparency 8.3d
8
Finding the Point of Indifference
  • At what production volume are the costs of the
    manual and the automatic binding equipment equal?
  • Total cost manual Total cost automatic
  • 1,000 ?
    (X) 9,000 ? (X)
  • 1,000 1.80(X)
    9,000 .02(X)
  • Solve for X
  • (1.8 - .02) (X) 9,000 - 1,000

  • X 8,000 / 1.78

  • X 4,494 units

18
2
10 units
100 units
Transparency 8.4
9
Understanding the Scale Factor
  • Economies of scale doctrine
  • most efficient size for a facility
  • most efficient size for a firm
  • Put a large volume of the same product across the
    same equipment or fixed cost base.
  • Economies of scope occurs when a large volume and
    high variety of products are produced by the same
    equipment for fixed cost base

Transparency 8.5
10
Scale Factor Cost-Volume Profit Model (Slide 1
of 3)
  • TR (SP) (Xs)
  • TR Total Revenue
  • SP Selling price/unit
  • Xs Number of units sold
  • TC FC (VC) (Xp)
  • TC Total cost
  • FC Fixed cost
  • VC Variable cost/unit
  • Xp Number of units produced

Transparency 8.6a
11
Scale Factor Cost-Volume Profit Model (Slide 2
of 3)
  • The profit (P) equation is
  • P TR -TC
  • P SP(Xs) - FC
    VC(Xp)
  • If X Xs Xp, then
  • P SP(X) - FC
    VC(X)
  • P SP(X) - VC(X) - FC
  • P FC (SP - VC)(X)

Transparency 8.6b
12
Scale Factor Cost-Volume Profit Model (Slide 3
of 3)
  • Solve for X as follows
  • X
  • If C is defined as contribution/unit, then C
    (SP - VC).
  • Then the equation becomes
  • X

(P FC)
(SP - VC)
(P FC)
C
Transparency 8.6c
13
Cost-Volume-Profit Model
Transparency 8.7
(Exhibit 8.2)
14
Assumptions of the Cost-Volume-Profit Model
  • Sales volume is equal to production volume
  • Total cost and total revenue are linear functions
    of volume
  • Historical data on costs and selling price are
    representative of what will happen in the future
  • The organization has only one product

Transparency 8.8
15
Multiple-Product Case (Slide 1 of 3)
  • Hint Fixed cost shared by all 3 products.
  • Coffee Pot
    Mixer Blender
  • Product mix 45
    20 35
  • Selling price/unit 12 16
    9
  • Variable cost/unit 6 7 4
  • Contribution unit 6 9 5
  • Profit target
    20,000/yr.
  • Fixed cost
    30,000/yr.
  • WC .45(12/unit - 6/unit) .2(16/unit -
    7/unit) .35(9/unit -4/unit)
  • 6.25 unit

Transparency 8.9a
16
Multiple-Product Case (Slide 2 of 3)
  • In the multiple-product case, the weighted
    contribution per unit substitutes for the
    contribution per unit.
  • X
  • 20,000
    30,000

  • 6.25/unit
  • 8,000 units

P FC
WC
Transparency 8.9b
17
Multiple-Product Case (Slide 3 of 3)
  • Interpreting the results The variable X is
    measured as a composite unit, that is, a unit
    consisting of 45 coffee pot, 20 mixer and 35
    blender.
  • One
    composite unit
  • .45
    .2 .35
  • Coffee Pot
    Mixer Blender
  • Product Mix
    No. Required
  • Coffee Pot .45
    3,600 units
  • Mixer .20
    1,600 units
  • Blender .35
    2,800 units

  • 8,000 units

Transparency 8.9c
18
Cost Structure of Low-Volume Producer
Transparency 8.10
(Exhibit 8.3)
19
Cost Structure of High-Volume Producer
Transparency 8.11
(Exhibit 8.4)
20
Operating Leverage
Transparency 8.12
(Exhibit 8.5)
21
Matching Process Alternatives with Product
Characteristics
Transparency 8.13
(Exhibit 8.6)
22
Characteristics of the Process Alternatives
Transparency 8.14
(Exhibit 8.7)
23
Process Flows Before and After Applying Group
Technology (Slide 1 of 2)
Transparency 8.15a
(Exhibit 8.8)
24
Process Flows Before and After Applying Group
Technology (Slide 2 of 2)
Transparency 8.15b
(Exhibit 8.8)
25
Automation Systems
Transparency 8.16
(Exhibit 8.9)
26
Problems with Managing Large, Unfocused
Operations (Slide 1 of 2)
  • Growing facilities add more levels of management
    and make coordination and control difficult
  • New products are added to the facility as
    customers demand greater product variety
  • Hidden overhead costs increase as managers add
    staff to deal with increased complexity

Transparency 8.17a
27
Problems with Managing Large, Unfocused
Operations (Slide 2 of 2)
  • The result is higher operating costs
  • Productive time is being taken to do setups
  • More mistakes are made by attempting to manage
    increasing complexity with control systems
    designed for a single product facility

Transparency 8.17b
28
Focused Factory
  • Smaller facility (less than 500 employees)
    concentrates on one or few products
  • Limits scope of operations to a few process
    technologies
  • Strives only for highest level of quality
  • Strives for simplicity in management and control

Transparency 8.18
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