Burger Doodle is a fast-food restaurant that processes an average of 680 food or
ID: 463111 • Letter: B
Question
Burger Doodle is a fast-food restaurant that processes an average of 680 food orders each day. The average cost of each order is $6.15. Four percent of the orders are incorrect, and only 10% of the defective orders can be corrected with additional food items at an average cost of $1.75. The remaining defective orders have to be thrown out.
Please show your work.
a. Compute the average product cost.
b. In order to reduce the number of wrong orders, Burger Doodle is going to invest in a computerized ordering and cash register system. The cost of the system will increase the average order cost by $0.05 and will reduce defective orders to 1%. What is the annual net effect of this quality improvement initiative?
c. What other indirect effects on quality might be realized by the new computerized order system?
Explanation / Answer
a.
To calculate product cost first calculate product yield (Y) by following formula:
Y = (total input)(% good units) + (total input)(1-% good units)(%reworked units)
Y = (I)(%G) + (I)(1 - %G)(%R)
Where,
I = Planned Output
%G = percentage of good units produced
%R = Percentage of defective units that are successfully reworked
In these case,
I = 680 order per day
Percentage of incorrect orders = 4%
%G = 100 – 4% = 96%
%R = 10%
The order yield for Burger Doodle is:
Y = (680)(0.96) + (680)(1 – 0.96)(0.1)
Y = 655.52 orders per day
The order yield of Burger Doodle is 655.52 orders per day.
Order Cost for Burger Doodle is determined from following formula:
Product cost = [(Kd)(I) + (Kr)(R)]/Y
Where,
Kd= direct manufacturing cost per unit
Kr= reworking cost per unit
R = reworked units
For Burger Doodle,
Kd= $6.15 per order
Kr= $1.75 per order
R = I x % rejection x % rework = 680 x 0.04 x 0.1 = 2.72 orders
Average Product cost = ($6.15 x 680 + $1.75 x 2.72)/655.52
Average Product Cost = $6.39 per order
b.
By installing new system,
I = 680 order per day
Percentage of incorrect orders = 1%
%G = 100 – 1% = 99%
%R = 10%
The order yield for Burger Doodle is:
Improved Y = (680)(0.99) + (680)(1 – 0.99)(0.1)
Improved Y = 673.88 orders per day
Also,
Kd= $6.15 + $ 0.05 = $6.20 per order
Kr= $1.75 per order
R = I x % rejection x % rework = 680 x 0.01 x 0.1 = 0.68 orders
Improved Average Product cost = ($6.20 x 680 + $1.75 x 0.68)/673.88
Average Product Cost = $6.26 per order
By implementing computerized system, Burger Doodle can reduce the product cost by 6.39 – 6.26 = $0.13 per order.
Thus, Annual saving due to quality improvement initiative will be,
Annual saving = 365 days x $0.13 per order = $47.45
c. What other indirect effects on quality might be realized by the new computerized order system?
Due to reduction in the defects following indirect benefits will be occur:
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