7. The Initial cost of a fixture is $1000. Given that the interest rate on inves

Question

7. The Initial cost of a fixture is $1000. Given that the interest rate on investment as 6%, maintenance cost of fixture is 8%, tax requirement on fixture investment is 4% and the depreciation of fixture is to be taken as 60% per year. Setup cost of the fixture is about $60 per single setup. If the time saved because of the use of fixture is about 0.03 hours with a labour hourly cost of $15, calculate the number of parts to be produced per year to offset the cost of the fixture. If the cost of the fixture is to be recovered in the first year, what should be the production volume required? If the economical batch size of manufacture for the parts is 2000, how many batches should be produced per year to offset the cost of the fixture?

Explanation / Answer

Given Data:

C = Initial cost of fixture = $ 1000

I = interest rate on investment = 6%

M = maintenance cost of fixture = 8%

T = tax requirement on fixture investment = 4%

D = depreciation of fixture = 60%

S = setup cost = $60

t = time save due to fixture = 0.03 hours

a = labor hourly cost = 15$

i) Yearly cost of fixture , Y = S + C(I + M + T + D) = 60 + 1000 (0.06+0.08+0.04+0.6) = $ 840

Cost saving due to fixture, A = a*t = 15 x 0.03 = $ 0.45

Number of parts to be produced to offset the cost of fixture, N = Y /A = 840 / 0.45 = 1866.67

N = 1867

ii) If the cost of the fixture is to be recovered within the first year, we set the depreciation cost to 100%

Yearly cost of fixture , Y = S + C(I + M + T + D) = 60 + 1000 (0.06+0.08+0.04+1) = $ 1240

Thus, production volume required is, N = 1240 / 0.45 = 2755.56

N = 2756

iii) Economic batch size = 2000, no. of batches = ?

since economic batch size > N (1867)

Thus 1 batch has to be manufactured to offset the yearly cost of the fixture.

or 2 batches if the cost has to be recovered in the first year itself.

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