Chapter 13, Problem 24P

Lander Parts, Inc., produces various automobile parts. In one plant, Lander has a manufacturing cell with the theoretical capability to produce 450,000 fuel pumps per quarter. The conversion cost per quarter is $9,000,000. There are 150,000 production hours available within the cell per quarter.

Required:

1. 1. Compute the theoretical velocity (per hour) and the theoretical cycle time (minutes per unit produced).
2. 2. Compute the ideal amount of conversion cost that will be assigned per subassembly.
3. 3. Suppose the actual time required to produce a fuel pump is 40 minutes. Compute the amount of conversion cost actually assigned to each unit produced. What happens to product cost if the time to produce a unit is decreased to 25 minutes? How can a firm encourage managers to reduce cycle time? Finally, discuss how this approach to assigning conversion cost can improve delivery time.
4. 4. Assuming the actual time to produce one fuel pump is 40 minutes, calculate MCE. How much non-value-added time is being used? How much is it costing per unit?
5. 5. Cycle time, velocity, MCE, conversion cost per unit (theoretical conversion rate × actual conversion time), and non-value-added costs are all measures of performance for the cell process. Discuss the incentives provided by these measures.

To determine

Calculate the theoretical velocity and the theoretical cycle time.

Explanation of Solution

Cycle time: Cycle time and velocity are two operational “measures of responsiveness”. Cycle time is the span of time taken to produce a unit of output from the time the materials are received till the good is supplied to finished goods inventory. Therefore, cycle time is the time taken to produce a product.

Velocity: Velocity is the number of units of output that could be produced within a given period of time.

Calculate theoretical velocity:

$\begin{array}{c}\text{Theoretical}\text{velocity}\text{=}\frac{\text{Fuel}\text{pumps}\text{produced}\text{per}\text{quarter}}{\text{Production}\text{hours}\text{available}}\\ \text{=}\frac{\text{450,000}\text{fuel}\text{pumps}}{\text{150,000}\text{hours}}\\ \text{=}\text{3}\text{carburetors}\text{per}\text{hour}\end{array}$

Calculate theoretical cycle time:

$\begin{array}{c}\text{Theoretical}\text{cycle}\text{time}\text{=}\frac{\text{Time}\text{taken}}{\text{Units}\text{produced}}\\ \text{=}\frac{\text{60}\text{minutes}}{\text{3}\text{units}}\\ \text{=}\text{20}\text{minutes}\text{per}\text{unit}\end{array}$

To determine

Calculate ideal amount of conversion cost assigned per subassembly.

Explanation of Solution

Conversion cost:  The cost of changing the materials into a finished product. It includes direct labour costs and manufacturing overhead costs.

Calculate the conversion cost assigned per subassembly:

$\begin{array}{c}\begin{array}{l}\text{Conversion cost assigned}\\ \text{ per subassembly}\end{array}\}\text{=}\text{Conversion}\text{cost}\text{rate}\text{×}\text{Cycle}\text{time}\\ \text{=}\text{\$1}(1)\text{×}\text{20}\text{minutes}\\ \text{=}\text{\$20}\end{array}$

Working note:

(1)Calculate the conversion cost rate:

$\begin{array}{c}\text{Conversion}\text{cost}\text{rate}\text{=}\frac{\text{Conversion}\text{cost}\text{per}\text{quarter}}{\left(\begin{array}{l}\text{Production}\text{hours}\text{available}\\ \text{×}\text{Time}\text{taken}\end{array}\right)}\\ \text{=}\frac{\text{\$9,000,000}}{\text{150,000}\text{hours}\text{×}\text{60}\text{minutes}}\\ \text{=}\text{\$1}\text{per}\text{minute}\end{array}$

To determine

Explain the manner in which this approach in assigning conversion cost can improve delivery time.

Explanation of Solution

The conversion cost assigned will be $25 $\left(\text{\$1}\text{×}\text{25}\text{minutes}\right)$ and savings will be $15 $\left(\text{\$40}\text{(2)}-\text{\$25}\right)$ per unit, if the time is reduced to 25 minutes from 40 minutes. Incentive will be provided to cell managers to decrease cycle time, if product cost is lowered. Reduction in cycle time signifies that the products are produced faster; therefore they will be delivered promptly on time.

Working note:

(2)Calculate applied conversion cost:

$\begin{array}{c}\text{Applied}\text{conversion}\text{cost}\text{=}\text{Conversion}\text{cost}\text{rate}\text{×}\text{Time}\text{required}\text{to}\text{produce}\text{fuel}\text{pump}\\ \text{=}\text{\$1}\text{×}\text{40}\text{minutes}\\ \text{=}\text{\$40}\end{array}$

To determine

Calculate MCE (manufacturing cycle efficiency), the non-value –added time used and calculate the costing per unit.

Explanation of Solution

Calculate manufacturing cycle efficiency:

$\begin{array}{c}\text{Manufacturing}\text{cycle}\text{efficiency}\text{=}\frac{\text{Theoretical}\text{time}}{\text{Actual}\text{time}}\\ \text{=}\frac{\text{20}\text{minutes}\text{per}\text{unit}}{\text{40}\text{minutes}\text{per}\text{unit}\text{(2)}}\\ \text{=}\text{0}\text{.50}\end{array}$

Calculate wasted time:

$\begin{array}{c}\text{Wasted}\text{time}\text{=}\text{Actual}\text{time}-\text{Theoretical}\text{time}\\ \text{=}\text{40}\text{minutes}\text{per}\text{unit}\text{(2)}-\text{20}\text{minutes}\text{per}\text{unit}\\ \text{=}\text{20}\text{minutes}\text{per}\text{unit}\end{array}$

Calculate the costing per unit:

$\begin{array}{c}\text{Costing}\text{per}\text{unit}\text{=}\text{Conversion}\text{cost}\text{rate}\text{×}\text{Theoretical}\text{time}\\ \text{=}\text{\$1}(1)\text{×}\text{20}\text{minutes}\\ \text{=}\text{\$20}\end{array}$

To determine

Briefly discuss the incentives provided by these measures.

Explanation of Solution

• Organizations must compete depending upon the time and cost in the advanced “manufacturing environment” and these objectives are supported by these measures. The aim is to reduce the cycle time by evading non-value added time.
• Since non-value-added time is decreased, manufacturing cycle efficiency is increased, and the conversion cost allocated per unit reduces. Likewise, as manufacturing cycle efficiency increases, a non-value-added time declines and non-value-added costs decrease, resulting in a lower-cost product.