04: A gcar manufacturer produces gears for a machine. Two processes, casting and
ID: 1139567 • Letter: 0
Question
04: A gcar manufacturer produces gears for a machine. Two processes, casting and forging, are possible for manufacturing and the parameters for each process are as follows 6 marks Casting 80 gears per hour 10 hours per day orging | 40 gears per hour 16 hours per day / Production rate Daily production t Percent of parts rejected based on visual inspection 20% Assume that the daily demand for gears allows all defect-free gears to be sold and rejected gears cannot be sold Find the process that maximizes profit per dayif each part is made from $5 worth of material and can be sold for $70. Variable overhead cost is charged at $90 per hourExplanation / Answer
Number of defect-free gears = Production rate x Daily production time x (1 - Percent rejected)
Casting process: 80 x 10 x 91 - 0.2) = 800 x 0.8 = 640 gears
Forging process: 40 x 16 x (1 - 0.1) = 640 x 0.9 = 576 gears
Material cost, Casting process = 80 x 10 x $5 = $4,000**
Material cost, Forging process = 40 x 16 x $5 = $3,200**
(**We have considered Cost of Production to compute daily profit)
Variable overhead, Casting process = 10 x $90 = $900
Variable overhead, Forging process = 16 x $90 = $1,440
Sales revenue, Casting process = Price x Quantity = $70 x 640 = $44,800
Sales revenue, Forging process = $70 x 576 = $40,320
Profit = Sales revenue - Material cost - Variable overhead cost
Casting process: $(44,800 - 4,000 - 900) = $39,900
Forging process: $(40,320 - 3,200 - 1,440) = $35,680
Since Casting process results in higher profit, Casting process should be selected.
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