You are an engineer for a plastics manufacturing company. In examining cost-saving measures, your team has brainstormed the following ideas (labeled Idea A and Idea B). It is your responsibility to evaluate these ideas and recommend which one to pursue. You have been given a graph of the current process. A copy of this graph has been provided online; you may use one of these graphs, or use graph paper as directed by your instructor.
- a. What is the selling price of the product?
Current Cost: The current process has been running for a number of years, so there are no initial fixed costs to consider.
In the operating costs, the process requires the following:
|
$2.00/pound-mass of resin |
|
S0.15/pound-mass of resin |
|
$0.10/pound-mass of resin |
- b. There is also a cost associated with taking the scrap material to the landfill. Using the total cost determined from the graph, find the cost of landfill, in dollars per pound-mass of resin.
Idea A: Your customer will allow you to use regrind (reprocessed plastic) in the parts instead of 100% virgin plastic. Your process generates 10% scrap. Evaluate using all your scrap materials as regrind, with the regrind processed at your plant.
- c. You will need to purchase a regrind machine to process the plastic, estimated at a cost of $100,000. Using the regrind will alter the following costs, which account for using 10% scrap material:
■ Material cost: | $1.80/pound-mass of resin |
■ Energy cost: | $0.16/pound-mass of resin |
■ Labor cost: | $0.11/pound-mass of resin |
This idea will eliminate the landfill charge required in the current process (see part [b]). Draw the total cost curve for Idea A on the graph or on a copy.
- d. How long (in pounds of resin processed) before the company reaches breakeven on Idea A?
- e. At what minimum level of production (in pound-mass of resin processed) will Idea A begin to generate more profit than the current process?
Your customer will allow you to use regrind (reprocessed plastic) in the parts instead of 100% virgin plastic. Evaluate using 25% regrind purchased from an outside vendor.
- f. Using the regrind from the other company will alter the following costs, which account for using 25% scrap material purchased from the outside vendor:
■ Material cost: | $1.85/pound-mass of resin |
■ Energy cost: | $0.15/pound-mass of resin |
■ Labor cost: | $0.11/pound-mass of resin |
This idea will eliminate the landfill charge required in the current process (see part [b]) and will not require the purchase of a regrind machine as discussed in Idea A. Draw the total cost curve for Idea B on the graph or on a copy.
- g. At what minimum level of production (in pound-mass of resin processed) will Idea B begin to generate more profit than the current process?
- h. At a production level of 500,000 pound-mass of resin, which Idea (A, B, or neither) gives the most profit over the current process?
- i. If the answer to part (h) is neither machine, list the amount of profit generated by the current process at 500,000 pound-mass of resin. If the answer to part (h) is Idea A or Idea B, list the amount of profit generated by that idea at 500,000 pound-mass of resin.
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