Atlas Inc. is a toy bicycle manufacturing company producing a five-inch small ve
ID: 396600 • Letter: A
Question
Atlas Inc. is a toy bicycle manufacturing company producing a five-inch small version of the bike that Lance Armstrong rode to win his first Tour de France. The assemblyline at Atlas Inc. consists of seven work stations, each performing a single step. Stations and processing times are sumarized here:
Step 1: 25 seconds
Step 2: 25 seconds
Step 3: 35 seconds
Step 4: 25 seconds
Step 5: 30 seconds
Step 6: 30 seconds
Step 7: 45 seconds
Under the current process layout, workers are allocated to the stations as shown here:
Worker 1: Steps 1 and 2
Worker 2: Steps 3 and 4
Worker 3: Step 5
Worker 4: Step 6
Worker 5: Step 7
Assume the workers are paid $20 per hour. Each bicycle is sold for $6 and includes parts that are sourced for $1. The company has fixed costs of $225 per hour. Despite Lance Armstrong's doping confession, there exists substantially more demand for the bicycle than Atlas can supply.
a. What is the cost of direct labor for the bicycle?
b. How much profit does the company make per hour?
c. What would be the profits per hour if Atlas would be able to source the parts 8% cheaper ($0.92 for the parts of one unit, but the fixed costs and productivity will remain the same as before)?
d. What would be the profits per hour if Atlas would be able to reduce fixed costs by 9% (to $204.75 per hour)?
e. What would be the profits per hour if Atlas would be able to reduce the processing time at the bottleneck by 3 seconds per unit (assume unlimited demand, not that reducing the processing time may cause the bottleneck to shift to a different process or create multiple, identical bottlenecks)?
Explanation / Answer
Following are the processing time for each process :
Process consisting of step 1 and step 2 : 25 + 25 = 50 seconds
Process consisting of step 3 and step 4 : 35 + 25 = 60 seconds
Process consisting of step 5 : 30 seconds
Process consisting of step 6 : 30 seconds
Process consisting of step 7 : 45 seconds
Out of above, the process consisting of step 3 + step 4 has the longest processing time and hence should be considered as bottleneck process of the system.
Since , processing capacity of the system will be determined by capacity of the bottleneck process, system process capacity will be 60 seconds/ bike
Therefore, hourly capacity of the system = 3600 seconds/ 60 seconds = 60 units
Total hourly wages paid to the 5 workers = $20 / worker x 5 workers = $100
Therefore , cost of direct labour for the bicycle = $100 / 60 = $1.67 per bicycle
Hourly profit of the company
= Price/ unit x Number of units sold per hour – Sourcing cost / unit x Number of units sold per hour – Total hourly wages paid to 5 workers – Fixed cost per hour
= $6 x 60 - $1 x 60 - $100 - $225
= $360 - $60 - $100 - $225
= - $25
Revised sourcing cost = $0.92 / unit
Revised hourly profit for the company
= = Price/ unit x Number of units sold per hour – Sourcing cost / unit x Number of units sold per hour – Total hourly wages paid to 5 workers – Fixed cost per hour
= $6 x 60 - $0.92 x 60 - $100 - $225
= $360 - $55.2 - $100 - $225
= - $20.2
Revised fixed cost = $204.75
Revised hourly profit for the company
= Price/ unit x Number of units sold per hour – Sourcing cost / unit x Number of units sold per hour – Total hourly wages paid to 5 workers – Fixed cost per hour
= $6 x 60 – $1 x 60 - $100 - $204.75
= $360 - $60 - $100 - $204.75
= - $4.75
If the processing time at the bottleneck ( step 3 + step 4 ) reduces by 3 seconds, processing time at bottleneck will become 57 seconds. However, still it will be the bottleneck process by virtue of having the highest processing time .
The revised capacity of the system will be = 57 seconds/ bike
Hourly capacity of the system = 3600 / 57 = 63.16 units ( rounded to 2 decimal places )
Revised hourly profit for the company with hourly capacity of 63.16 units
= Price/ unit x Number of units sold per hour – Sourcing cost / unit x Number of units sold per hour – Total hourly wages paid to 5 workers – Fixed cost per hour
= $6x 63.16 - $1 x 63.16 - $100 - $225
= $378.96 – 63.16 - $100 - $225
= $53.96
- Cost of direct labour for the bicycle = $1.67 per bicycle
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