You are an experienced machinist with a small tool shop. You have been asked to
ID: 361444 • Letter: Y
Question
You are an experienced machinist with a small tool shop. You have been asked to submit a bid to produce fifteen (15) special clamps for a new die that is under construction. You estimate that the material costs (metal and fasteners) for each clamp are $140.00. You also estimate that 10.00 labor hours are needed to produce the first clamp. The value of your labor is $50/hour.
From similar orders in the past, you estimate that there is a 85% learning curve for this type of work. Using this information, what is the lowest total bid you should submit if you charge a 10% markup on material and you wish to recoup your labor costs? (Hint: if you know how, it will save time to set up formulas in Excel. Just attach a print-out of Excel work) (3 POINTS)
Your potential customer is receptive to your bid from part a, but is hesitant to award you the order because the average cost per clamp that you bid is 5% higher than his target. You respond to the customer that if they would increase their order from 15 clamps to x clamps, you could beat his target price. What is x? (Hint: again, while you can do it by hand, it is tedious so setting it up in Excel saves time. Just attach a print-out of Excel work) (3 POINTS)
Explanation / Answer
We will use standard learning curve table to calculate total labour hours required to produce 15 clamps
Time required to produce 1st Clamp = 10 hours
Learning rate = 85%
Thus as per table, total hours required to produce 15 clamps = 98.61 hours
Therefore, total labour cost involved ( @ $50 / hour ) = $50 x 98.61 = $4930.50
Total material cost for 15 clamps ( @ $140 / clamp ) = 15 x 140 = $2100
Since , 10% mark up is done on material cost and full labor cost is recovered,
Lowest total bid value
1.10 x Total material cost + Total labour cost
= 1.10 x 2100 + 4930.50
= 2310 + 4930.50
= $7240.50
LOWEST TOTAL BID = $7240.5
Average cost per clamp as per above bid = $7240.50 / 15 = $482.7
Since above bid is 5% higher than the target average cost per clamp
Target price per clamp = $482.7 /1.05 = $459. 71
Therefore , total value of target bid for X number of items = $459.71.X
Also, Since:
Target bid = 1.1 x Material cost/ unit. X ( units ) + Labour cost / hour x Number of hours required for X units
Therefore,
459.71X = 1.1 x 140.X + 50 x Total labour hours required
Or , 459.71X =154.X + 50xTotal labour hours required
Or, 50 x Total labour hours required = 459.71.X – 154.X = 305.71X
Or, Total labour hours required = 6.114.X ( OR 6.12 .X rounded to 2 decimal places)
It means average labour hours required for each unit of item ( Total for X units ) = 6.12 hours
As per Learning curve table :
Average labour hours is 6.14 hour/ unit for 21 items
Average labour hours is 6.08 hour / unit for 22 items
Since required outcome of 6.12 hours is nearest to 6.14 hour/ unit as applicable for 21 items , the required revised bid should be for 21 items
X WILL BE 21 ITEMS
LOWEST TOTAL BID = $7240.5
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