Model 3 front trunk The engineers believe that, compared with the conventional t

Question

Model 3 front trunk The engineers believe that, compared with the conventional technique, laser welding technique would result in significant savings and improvement in quality. On the basis of an annual volume of 4,000 unit production, Tesla engineers have estimated the financial data provided in the table below. Welding Method Conventional Laser Welding Description Steel cost/part Transportation cost/ part Blanking cost/ part Initial investment $19.98 $0.80 $1.95 $100,000 $15.67 S0.55 $0.17 $130,000

Explanation / Answer

Since lifetime is 10 years for each option, we use Present Worth (PW) method of costs, for evaluation.

(1) Conventional method

Total annual variable cost ($) = 4,000 x (19.98 + 0.8 + 1.95) = 4,000 x 22.73 = 90,920

PW, Conventional ($) = 100,000 + 90,920 x P/A(12%, 10) = 100,000 + 90,920 x 5.6502**

= 100,000 + 513,716 = 613,716

(2) Welding method

Production in year 1 (for 6 months) = 4,000 x (6/12) = 2,000

Total annual variable cost, year 1 ($) = 2,000 x (15.67 + 0.55 + 0.17) = 2,000 x 16.39 = 32,780

Total annual variable cost, years 2-10 ($) = 4,000 x (15.67 + 0.55 + 0.17) = 4,000 x 16.39 = 65,560

PW, Welding ($) = 130,000 + 32,780 x P/F(12%, 1) + 65,560 x P/A(12%, 9) x P/F(12%, 10)

= 130,000 + 32,780 x 0.8929** + 65,560 x 5.3282** = 130,000 + 29,269 + 349,317 = 508,586

(3) Purchase from subcontractor

PW, Purchase = 4,000 x $22.95 x P/A(12%, 10) = $91,800 x 5.6502** = 518,688

Since the Welding method has minimum PW of costs, this method should be selected.

**From P/A and P/F Factor tables

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