Within The last month, The raw material price and consumable price combined has

Question

Within The last month, The raw material price and consumable price combined has increased by 5 5%. If The throughput was 5 parts/hour, estimate The future throughput that has to take place in order to maintain a constant production cost. Consider, The yield of this production is 90%. It is known that materials contained in each product weigh 2.5kg, materials (including consumables) cost is $100/kg, All equipment cost is $750,000 to be written off in 5 years with an average machine utilization of 45% over 24 hr/day, tooling cost is $200, The overhead rate (including labor) is $250/hr, energy cost is $25/hr, space and administration cost is $120/hr, and information (R&D;, royalties, licenses) is S35/hr.

Explanation / Answer

There is a Calculation only on Variable Cost i.e. Raw Material and Consumable Cost

Following is the calculation of throughput for maintaining a constant production

1) Consider Last Month Raw material & Consumable Cost Before Increase per Product

Raw material x Raw material cost

= 2.5KG X $ 100/-

= $250/-

Total Production (24 Hours) = 5 Product X 24 Hours

= 120 Product. (i.e.5 parts/hours)

Hence,

Current Total Production Cost after Consider Only Raw material & Consumable Cost for Per Day

= Total Production x Overhead cost

        = 120 x 250

        = $ 30000

2) Increased 5.5% than Revalue of Production Cost = Total Production + (Total Production x Increased Price

= 250 + (250 x 5.5%)

= $263.75 per product.

3) Future Throughout = Current Total Production / Increased Production Cost

= 30000 / 263.75)

= 113.74

The future throughout to maintain a constant product cost is 113.74

To maintain production cost constant as per last month,

Production will reduce % = (Future throughout / Total Production) x 100

= (113.74/120) x 100

=94.78 %.

Note:-

There is only one change consider i.e. Change in Variable cost (raw material & consumable cost) because all other related fixed cost and variable cost remained constant.

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