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The Grover Screw Machine Products Company recently received a bid of 10,000 spacers from a customer. Based on the capability of GSMPC, they are able to produce 6 alternative methods. The manager of GSMPC has to decide which method has great advantage to help company to win the bid. Calculating the contribution margin of each methods and get the breakeven, those numbers would help them to recognize the revenue and cost they get from different methods. The following table showed the cost of methods
Exhibit 1 Cost of steel methods
Steel Rod, No Hole Steel Rod, Hole Steel tubing
Machining charge 4. 17.78 .86
Material cost .46 .46 7.
Setup cost 0.8 1 0.8
Price (1000 spacers) 7.75 1.4 0.86
Operation time (10000) 54 hours 8 hours 6 hours
At first, we have to calculate the cost of the rest methods by producing with brass. The following table is calculation of ¡§Brass Rod, No Hole¡¨
Material
Weight of Brass Rod feet 1.1 lbs = 6.16
Scrap value 5 $0.16 = $0.8
Total Cost of Brass Rod 6.16 $0./lb - $0.8= $10.048
Setup
Estimated hours $4 / 10(000) = $0.8 per 1,000
Machining
Cutoff
0.0 in / 0.00 in =165 revolutions required for cutoff
600 (rpm) / 60 (sec) = 60 revolutions per second
165 rev / 60 rev. per sec. = .75 seconds required for cutoff
Chamferring
Approx. seconds
Summary
Total time per piece .75 + = 4.75 sec.
600 sec. / 4.75 sec. = 758 spacers per hour
1000 / 758 = 1. hours total machine time per 1,000 spacers
1. $6.5 = $8.8 total machining charge
The following table is calculationof ¡§Brass Rod, Hole¡¨
Material
Weight of Brass Rod feet 1.1 lbs = 6.16
Scrap value 17 $0.16 = $.7
Total Cost of Brass Rod 6.16 $0./lb - $.7= $8.18
Setup
Estimated .5 hours $4 / 10(000) = $1 per 1,000
Machining
Cutoff
0.150 in / 0.00 in =75 revolutions required for cutoff
600 (rpm) / 60 (sec) = 60 revolutions per second
75 rev / 60 rev. per sec. = 1.5 seconds required for cutoff
Drilling
0.150 in / 0.006 in = 5 revolutions required for centering drilling
0.8 / 0.006 = 55 revolutions required for drilling
5 rev. + 55 rev. =80 rev. total
80 rev / 60 rev. per sec = 1. sec. required for centering and drilling
Chamferring
Approx. seconds
Summary
Total time per piece 1. + = . sec.
600 sec. / . sec. = 1081 spacers per hour
1000 / 1081= 0. hours total machine time per 1,000 spacers
0. $6.5 = $5.055 total machining charge
The following table is calculation of ¡§Brass Tubing, Hole¡¨
Material
Weight of Brass Rod feet 0.7 lbs = .4
Scrap value 1 $0.16 = $0.16
Total Cost of Brass Rod .4 $0.5/lb - $0.16= $11.488
Setup
Estimated .5 hours $4 / 10(000) = $1 per 1,000
Machining
Cutoff
0.150 in / 0.00 in =75 revolutions required for cutoff
600 (rpm) / 60 (sec) = 60 revolutions per second
75 rev / 60 rev. per sec. = 1.5 seconds required for cutoff
Chamferring
Approx. seconds
Summary
Total time per piece 1.5 + = .5 sec.
600 sec. / .5 sec. = 1108 spacers per hour
1000 / 1108= 0. hours total machine time per 1,000 spacers
0. $6.5 = $5.715 total machining charge
We also can make a table as exhibit 1 showed the cost summary of brass methods.
Exhibit Cost of brass methods
Brass Rod, No Hole Brass Rod, Hole Brass Tubing
Machining charge 8.8 5.055 5.715
Material cost 10.048 8.18 11.488
Setup cost 0.8 1 0.8
Price (1000 spacers) 1. 15.055 18.00
Operation time (10000) 1. hours . hours hours
Comparing the exhibit 1 and , we can find there is a significant difference between steel methods and brass methods. Steel methods have higher machining charge but lower material cost. On the contrary, brass methods have lower machining charge but higher material cost. Overall the all methods, the machine charge for using steel is more than three times of using brass for each process, so I don¡¦t suggest the manager of GSMPC choosing steel methods but brass methods. For the three brass methods, brass rod without hole has highest cost and longest operation hours. Besides, the operation time of brass rod with hole is closed to that of brass tubing, but the cost of brass rod with hole is much lower than brass tubing¡¦s. Aiming at capacity and cost points, I strongly recommend company to choose brass rod with hole.
For brass rod with hole method, the price of producing 10,000 spacers is $150.55 (10 15.055); profit is $6.75 (. hr $0.75), so the lowest price they use to bid is $14.8 (150.55 ¡V 6.75). It means if GSMPC cannot bid the price higher than $14.8, they will not gain from it. It is better give up the business.
Excepting methods, the other drawback of whole process is setup man who only works for the day shift. There has a risk if the machine failed to meet specifications on the night shift, the foreman has to shut it down, and wait for the setup man to adjust it on next day. This matter will disarrange the producing schedule and cause idle time and cost increased. I also suggest the company hire a more setup man for the night shift if the increased cost is acceptable.
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