Question

1. Two currently owned machines are being considered for the production of a part. The capital investment associated with the machines is about the same and can be ignored for purposes of this example. The important differences between the machines are their production capacities (production rate×available production hours) and their reject rates (percentage of parts produced that cannot be sold). Consider the following table:

Machine A                    Machine B
Production rate	100 parts/hour	130 parts/hour
Hours available for production	7 hours/day	6 hours/day
Percent parts rejected	3%	10%

The material cost is $6.00 per part, and all defect-free parts produced can be sold for $12 each. (Rejected parts have negligible scrap value.) For either machine, the operator cost is $15.00 per hour and the variable overhead rate for traceable costs is $5.00 per hour.

1. Assume that the daily demand for this part is large enough that all defect-free parts can be sold. Which machine should be selected?
2. What would the percent of parts rejected have to be for Machine B to be as profitable as Machine A?

Answer 1

Answer:

a.

Revenue from Machine A=[100*7-3% of 700]*$12=$8148

Cost of production on Machine A=100*7*6+7*20=$4340

Profit from machine A=$8148-$4340=$3808.

Revenue from Machine B=[130*6-10% of 780]*$12=$8424

Cost of production on Machine B=130*6*6+6*20=$4800

Profit from Machine B=$8424-$4800=$3624

Since profit from Machine A is higher it should be selected.

b.

Percentage of rejections of Machine should be reduced upto the level at which profits of Machine B wil be greater profit from Machine A. Revenue from Machine B should be greater than $8608($3808+4800). Units required for generating revenue of > $8608>$8608/12>717.33 units ,i.e. rejection of less than, 780-717=63 units, i.e. less than 63/780*100=8.08 % rejection.