Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 mo
ID: 2567529 • Letter: V
Question
Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240·The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters. What is the average waiting time for cycles if they are the only item manufactured? a. b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged? c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged? d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures? e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production f. What action do you recommend?Explanation / Answer
Answer:
a. What is the average waiting time for cycles if they are the only item manufactured?
Waiting time
= [92 × (1.5)2] / {[2 × [300 hr. a month - (92 × 1.5)]}
= 0.639 hours
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b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged?
Waiting time
= (92 × (1.5)2) + (20 × 1) / {2 × [300 - (92 × 1.5) - (20 × 1)]}
= 227/284
= 0.799 hours
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c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged?
Waiting time
= (92 × (1.2)2) + (20 × (0.8)2) / {2 × [300 - (92 × 1.2) - (20 × 0.8)]}
= 145.28/347.2
= 0.418 hours
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d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures?
Expected monthly margin without scooters:
Motorcycle sales (92 × $700)
$64,400
Manufacturing costs (92 × $400)
36,800
Expected margin
$27,600
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e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production.
Without changing assembly line:
Motorcycle sales (92 × $700)
$64,400
Scooter sales (20 × $450)
9,000
Total expected sales
73,400
Manufacturing costs:
Motorcycles (92 × $400)
$36,800
Scooters (20 × $200)
4,000
40,800
Expected margin
$32,600
With new assembly line:
Motorcycle sales (92 × $750)
$69,000
Scooter sales (20 × $500)
10,000
Total expected sales
79,000
Manufacturing costs:
Motorcycles (92 × $500)
$46,000
Scooters (20 × $240)
4,800
50,800
Expected margin
$28,200
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f. What action do you recommend?
Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line ($32,600 - $28,200).
Motorcycle sales (92 × $700)
$64,400
Manufacturing costs (92 × $400)
36,800
Expected margin
$27,600
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