World Wide Aerospace is a designer and manufacturer of products utilized in a va

Question

World Wide Aerospace is a designer and manufacturer of products utilized in a variety of aerospace applications. It supplies product to both military and commercial customers. On the military side the U.S. government is the primary customer with approximately 15% of its military sales going to foreign governments as either spares for U.S. designed aircraft or in an OEM (original equipment manufacturer) capacity. Other military customers include The Boeing Company, Lockheed Martin, Pratt and Whitney, Bell Helicopter and Rolls Royce. Commercial customers include The Boeing Company, United Technologies members and a number of foreign customers in Europe and BRIC countries. Sales to these customers account for approximately 45% of the total revenue. The nature of the business is low volume and high mix including mature and maturing products as well as new product designs for both markets (military and commercial) which makes up 21% of total revenue. For most products, product sales, development and lead times are long. Development times can be up to three years (although the company is under serious pressure to cut this by 50%) with manufacturing lead times of six months. The Director of Operations wants to know the impact of implementing productivity improving equipment in the shop. Currently on average it takes 20 hours to produce a unit at an average labor rate of $30 per hour. Material costs are $275 per unit and overhead costs are $15 per hour.

A. Calculate the single productivity factor based on labor costs (units per labor dollar) and the multifactor productivity (units per total dollars) based on total cost per unit (labor, overhead cost, material cost).

B. The director believes that implementing automation in certain parts of the process will increase productivity. It is estimated the amount of time to produce a unit will decrease by 25%, labor rates will remain constant but overhead rates will increase by $10 per hour. Perform the same calculations as in A.

C. Does automation increase labor and/or total productivity and by how much (need to calculate % difference)? (trick question)

D. What are the estimated savings of implementing automation v. conventional manufacturing if the line produces 64 units in the month?

Explanation / Answer

1) output is 1 unit.

30$ per hour is labour cost. 20 hours require to produce 1 unit.

Total cost of labour for 20 hours = 20 *$30= $600

So the single factor productivity = output/ input = 1/( 30*20) =0.00167 unit per labour dollar

The total cost of producing 1 unit = cost of labour + material cost+ overhead cost = 600+ 275+ 15=890$

So the multifactor productivity = output / input = 1/ 890= 0.00112 unit per dollar

2)

If time reduces by 25%. Then total time to produce 1 unit = 20 *(100-25%)= 15 hours.

The Labour cost will be same $30.

So the total labour cost = 15*$30= $450

The single factor productivity = 1/ $450= 0.00222

The overhead cost will increase by $10.

So the total overhead cost = $15+$10= $25

The total cost of production = $450+ $275+$25=$750

The multifactor productivity = 1/ $750= 0.001333 per dollar

3) the increase in single factor productivity = ( New productivity - old productivity)*100 / old productivity = (0.00222-0.00167)*100/0.00167=32.93%

The increase in multifactor productivity =( 0.00133 -0.00112)*100/0.00112= 18.75%

D. The total cost of manufacturing in convention method = $890 for 1 unit.

The total cost of manufacturing in automation method = $750 per unit

The net savings per unit =890-750= $140

So the net savings on 64 units = $140*64= $8960

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