Your company plans to release its first new product on July 1 this year. The man

Question

Your company plans to release its first new product on July 1 this year. The manufacturing will be outsourced, but your company will be required to provide the molds for the product at a fixed cost of $190,000 before manufacturing can begin. The molds are expected to last one month before they wear out and new molds need to be purchased. The manufacturer will charge $175/unit made which you will sell to your customers for $575 each. Marketing has provided the following demand forecast for July.

Demand Level

July Units Sold

Probability

Low Demand

425

30%

Medium Demand

750

50%

High Demand

1,500

20%

How many units does your company need to sell in July to break even? (3 points)

What is the total cost (fixed plus variable) in July if the product has high demand? (3 points)

What is the expected value of the total cost in July? (3points)

Problem 3: Theory of Constraints (6 points)

The restaurant you work for has the following four process areas and capacities.

Process Area                                                                      Capacity

Host: seat guests                                                              125 guests/hour

Wait Staff: take orders and deliver food                 175 guests/hour

Kitchen: prepare meals                                                  70 guests/hour

Clean up: clear tables                                                     130 guests/hour

What is the maximum number of guests this restaurant could feed in 4 hours? (2 points)

If additional wait staff are added to increase their capacity to 200 guests/hour, how many guests this restaurant could feed in 4 hours? (2 points)

If additional kitchen staff are added to increase their capacity to 150 guests/hour, how many guests this restaurant could feed in 4 hours? (2 points)

Demand Level

July Units Sold

Probability

Low Demand

425

30%

Medium Demand

750

50%

High Demand

1,500

20%

Explanation / Answer

Problem1)

Breakeven point is the point where Net revenue is equal to net costs i.e profits are zero.

In terms of equation breakevem occurs when Total Costs (TC) = Total Revenue ( TR)

let X is the demand for breakeven

a)Total costs here = Fixed costs + Variable costs = 190000 + 175X

Total revenue = 575X

190000 + 175X = 575X

implies X= 475

b) If the product has high demand, demand =1500

Total costs would be = 190000+ 1500X175 = 190000+ 262500 = $ 452500

c) For expected costs first we have to find expected demand

Expected demand in July = low demand X probability of low demand + medium demand X probability of medium demand + high demand X probability of high demand = 425X0.3 + 750X0.5 + 1500X0.2 = 803

Problem 3)

The maximum capacity of any process is the capacity of bottleneck operation i.e the operation which takes maimum time or has minimum capacity

here Kitchen has mimimum capacity and is hence the capacity of entire process

a) So the maximum number of guests the restaurant could feed in 4 hours is 70X4 = 280 guests

b) If wait staff is added they will have no impact on overall capacity because the bottleneck operation i.e Kitchen remains same , so capacity would be same as 280

c) If kitchen staff capacity is increased to 150 guests/ hour, the bottleneck operation becomes Host with capacity as 125 guests/hour so the guests which the restaurant can feed in 4 hours now becomes 125 X4 = 500 guests

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