1. Process Selection: Volume Drives Costs and Profits
COB 300C
Busing

2. Process Selection MECHANIZATION Work Force Process selection includes:
Technical issues–basic technology used to produce a service or good
Volume or scale decision–using the proper amount of mechanization to leverage the organization’s work force
Work Force
MECHANIZATION
Transparency 8.1

3. Product Design, Process Selection, and Capacity Decisions
Transparency 8.2
(Exhibit 8.1)

4. Volume Drives Costs (Slide 1 of 3)
Quick-as-a-Blink Printing Center needs to invest in equipment to bind books. Management could purchase manual or automatic binding equipment.
Annual Variable
Fixed Labor Production
Machine Cost Cost Rate
Manual $1, $18/hr units/hr
Automatic $9, $2/hr units/hr
The total-cost equation is as follows:
TC = FC + (VC) (Xp)
Transparency 8.3a

5. Volume Drives Costs (Slide 2 of 3)
Manual:
TC= $1, (1,000 units)
= 2,800
Unit Cost=
= $2.80 per unit at volume 1,000
$18/hr
10 units/hr
$2,800
1,000
Transparency 8.3b

6. Volume Drives Costs (Slide 3 of 3)
Automatic:
TC = $9, (1,000 units)
=$9,020
Unit cost =
= $9.02 per unit at volume of 1,000
$2/hr
100 units/hr
$9,020
1,000
Transparency 8.3c

7. Power of Volume to Reduce Costs
Volume Manual Automatic
$/unit $/unit
1, $ $9.02
10,
100,
Transparency 8.3d

8. Finding the Point of Indifference
At what production volume are the costs of the manual and the automatic binding equipment equal?
Total cost manual = Total cost automatic
$1, ? (X) = $9, ? (X)
1, (X)= 9, (X)
Solve for X:
( ) (X) = 9, ,000
X = 8,000 / 1.78
X = 4,494 units
$18 $2
10 units
100 units
Transparency 8.4

9. Understanding the Scale Factor
Economies of scale doctrine
most efficient size for a facility
most efficient size for a firm
Put a large volume of the same product across the same equipment or fixed cost base.
Economies of scope occurs when a large volume and high variety of products are produced by the same equipment for fixed cost base
Transparency 8.5

10. Scale Factor: Cost-Volume Profit Model (Slide 1 of 3)
TR= (SP) (Xs)
TR = Total Revenue
SP = Selling price/unit
Xs = Number of units sold
TC = FC + (VC) (Xp)
TC = Total cost
FC = Fixed cost
VC = Variable cost/unit
Xp = Number of units produced
Transparency 8.6a

11. Scale Factor: Cost-Volume Profit Model (Slide 2 of 3)
The profit (P) equation is
P = TR -TC
P = SP(Xs) - {FC + VC(Xp)}
If X= Xs = Xp, then
P = SP(X) - {FC + VC(X)}
P = SP(X) - VC(X) - FC
P + FC = (SP - VC)(X)
Transparency 8.6b

12. Scale Factor: Cost-Volume Profit Model (Slide 3 of 3)
Solve for X as follows:
X =
If C is defined as contribution/unit, then C = (SP - VC).
Then the equation becomes X=
(P + FC)
(SP - VC)
(P + FC) C
Transparency 8.6c

13. Cost-Volume-Profit Model
Transparency 8.7
(Exhibit 8.2)

14. Assumptions of the Cost-Volume-Profit Model
Sales volume is equal to production volume
Total cost and total revenue are linear functions of volume
Historical data on costs and selling price are representative of what will happen in the future
The organization has only one product
Transparency 8.8

15. Multiple-Product Case (Slide 1 of 3)
Hint: Fixed cost shared by all 3 products.
Coffee Pot Mixer Blender
Product mix % % %
Selling price/unit
Variable cost/unit
Contribution unit
Profit target = $20,000/yr.
Fixed cost = $30,000/yr.
WC = .45($12/unit - $6/unit) + .2($16/unit - $7/unit) +.35($9/unit -$4/unit)
= $6.25 unit
Transparency 8.9a

16. Multiple-Product Case (Slide 2 of 3)
In the multiple-product case, the weighted contribution per unit substitutes for the contribution per unit. X=
= $20,000 + $30,000
$6.25/unit
= 8,000 units
P + FC WC
Transparency 8.9b

17. Multiple-Product Case (Slide 3 of 3)
Interpreting the results: The variable X is measured as a composite unit, that is, a unit consisting of 45% coffee pot, 20% mixer and 35% blender.
One composite unit
Coffee Pot Mixer Blender
Product Mix No. Required
Coffee Pot ,600 units
Mixer ,600 units
Blender ,800 units
8,000 units
Transparency 8.9c

18. Cost Structure of Low-Volume Producer
Transparency 8.10
(Exhibit 8.3)

19. Cost Structure of High-Volume Producer
Transparency 8.11
(Exhibit 8.4)

20. Operating Leverage
Transparency 8.12
(Exhibit 8.5)

21. Matching Process Alternatives with Product Characteristics
Transparency 8.13
(Exhibit 8.6)

22. Characteristics of the Process Alternatives
Transparency 8.14
(Exhibit 8.7)

23. Process Flows Before and After Applying Group Technology (Slide 1 of 2)
Transparency 8.15a
(Exhibit 8.8)

24. Process Flows Before and After Applying Group Technology (Slide 2 of 2)
Transparency 8.15b
(Exhibit 8.8)

25. Automation Systems
Transparency 8.16
(Exhibit 8.9)

26. Problems with Managing Large, Unfocused Operations (Slide 1 of 2)
Growing facilities add more levels of management and make coordination and control difficult
New products are added to the facility as customers demand greater product variety
Hidden overhead costs increase as managers add staff to deal with increased complexity
Transparency 8.17a

27. Problems with Managing Large, Unfocused Operations (Slide 2 of 2)
The result is higher operating costs
Productive time is being taken to do setups
More mistakes are made by attempting to manage increasing complexity with control systems designed for a single product facility
Transparency 8.17b

28. Focused Factory
Smaller facility (less than 500 employees) concentrates on one or few products
Limits scope of operations to a few process technologies
Strives only for highest level of quality
Strives for simplicity in management and control
Transparency 8.18