This will be a short post. We will be adapting an example from Synchronous Manufacturing* as a tool to get some user feedback (hopefully).
Here is the scenario: You are an executive at a manufacturing firm. You have an older model stamping machine that can produce 100 units per hour (on average) for a product line that typically moves about 150,000 units per year.
Some of your middle managers have come to you with information about a new machine. This new model can produce an average of 300 units per hour—three times the output of your present machine.
Your managers have gotten estimates and believe they can have the machine (complete and installed) for about $45,000.
The direct labor rate you presently use in costing is $15 per hour and your overhead allocation factor is 2.80. So, your overhead allocation for each hour of direct labor is presently 2.80 times $15 per hour or $42 per hour.
The Decision is Yours
When replying to this article, you may leave a comment here or, if you wish to remain anonymous, please feel free to contact us directly.
Please answer the following questions:
What will be the direct labor cost savings from the purchase of the new machine, if any?
How much will overhead be reduced, if at all, through the acquisition of the new machine?
What do you estimate the total annual savings for your company will be if the new machine is put into service?
If you spend the $45,000 to acquire the new machine, what do you calculate the payback period to be?
Should you approve the investment in the new machine? Why or why not?
After we have some responses, we will address this question further.
Again, leave your replies as comments here, or feel free to use this link >> contact us << to contact us directly.
We look forward to hearing from you soon.
* Umble, M. Michael., and Mokshagundam L. Srikanth. Synchronous Manufacturing: Principles for World-class Excellence. Guilford: Spectrum, 1996. Print.