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in chapter 5 question no 4 can u please explain me the solutin its not clear the second step in which we r dividing 6 inutes with 60 i know we r converting it in hours but i wanted to know why??
The question asks for the return per hour, so to get this we divide the throughput per unit by the hours per unit.
Each unit takes 6 minutes, and since there are 60 minutes in an hour, it means each unit takes 0.1 hours.
Hello Sir Moffat,
Could you help with this question please. The question is from Student Accountant technical article achieve.
Example 2
Cat Co makes a product using three machines – X, Y and Z. The capacity of each machine is as follows:
Machine X Y Z Capacity per week 800 600 500
The demand for the product is 1,000 units per week. For every additional unit sold per week, net present value increases by $50,000. Cat Co is considering the following possible purchases (they are not mutually exclusive):
Purchase 1 Replace machine X with a newer model. This will increase capacity to 1,100 units per week and costs $6m.
Purchase 2 Invest in a second machine Y, increasing capacity by 550 units per week. The cost of this machine would be $6.8m.
Purchase 3 Upgrade machine Z at a cost of $7.5m, thereby increasing capacity to 1,050 units.
Required:
Which is Cat Co’s best course of action?SOLUTION
X. Y. Z. Demand
Current capacity per week 800 600 500* 1,000
Buy Z. 800. 600* 1050. 1,000
By Z & Y. 800*. 1,150. 1,050. 1,000
Buy Z, Y & X. 1,100. 1,150. 1,050. 1,000** = bottleneck resource
In order to make a decision as to which of the machines should be purchased, if any, the financial viability of the three options should be calculated.
OPTION 1
Buy Z
(Additional sales) = 600 – 500 = 100 units $’000
Benefit: 100 x $50,000. 5,000
Cost (7,500)
Net cost. (2,500)OPTION 2
Buy Z and Y
Additional sales = 800 – 500 = 300 units
Benefit: 300 x $50,000. 15,000
Cost ($7.5m + $6.8m). (14,300)
Net benefit. 700OPTION 3
Buy Z, Y and X
Additional sales = 1,000 – 500 = 500 units
Benefit: 500 x $50,000. 25,000
Cost ($7.5m + $6.8m + $6m). (20,300)
Net benefit. 4,700The company should therefore invest in all three machines if it has enough money to do so.
Sir, my questions is ‘where does the 500units which was subtracted from bottlenecks from each option comes from’ (under the additional sales). The rest of the calculation is clear enough.
Thank you for your time on this.
It is because the maximum capacity for Z is given in the question as being 500 units. So they cannot produce more than 500 units of Z.
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