Economics of Process Selection

Outline Economics of Process Selection Cost Factors Fixed vs. Variable costs Direct vs. Indirect costs

Can be attributed to the creation of specific product Manufacturing Cost Can be attributed to the creation of specific product Often called overhead Direct Cost Indirect Cost Varies with volume Does not vary with volume Fixed Variable Labor Preventative maintenance, salaried support Reactive maintenance, hourly support Material Rent Utilities Fixed Variable Fixed Variable Labor Salaried operator Hourly operator Material Material for the product Tooling Setup Labor costs, for example, can be indirect, as in the case of maintenance personnel and executive officers; or they can be direct, as in the case of project staff members. Similarly, materials such as miscellaneous supplies purchased in bulk—pencils, pens, paper—are typically handled as indirect costs, while materials required for specific projects are charged as direct costs. – Wikipedia Direct labor are those workers on the production line whose efforts directly produce what the factory manufactures. All other workers are classified as indirect workers. - http://smallbusiness.chron.com/calculate-direct-labor-indirect-labor-factory-payroll-23946.html

Process Cost Comparison Process Chain A Process Chain B Tooling Material Setup (could be multiple processes) Direct labor (could be multiple processes) Other (utilities, special inspection) Per Unit Cost Given: Production quantity (quantity per time) Lot or batch size (setup needed per batch) Process chains A and B produce functional comparable parts. Compare their per unit costs at a given production volume to compare associated economics.

Process Cost Comparison – Break-even Process B $/unit Process A $/unit Total Cost Start up cost per process (tooling, equipment, fixtures, etc.) Break-even Number of Units Produced

Practice Problem – Evaluating Alternatives Assume that for a given part the tooling cost is $8,000 and the material cost per part is $3.25 for manufacturing process 1. For manufacturing process 2, the tooling cost is $50,000 and the material cost per part is $2.30. At what production volume does manufacturing process 2 become attractive? 44,211 ACTIVTY

Practice Problem – Evaluating Alternatives When investigating methods to produce a part you compared Gray Iron casting with Aluminum Die casting. The investigation revealed a fixed cost for the Grey Iron method of about $5,000 and about $35,000 for the Die casting. The variable part cost for Gray Iron was $2.26 and was $1.98 for Die Casting. What is the break even production volume? If we were planning on making more parts than break even, which method would be preferred? How many more parts would you need to make to save your own cost to the company (Assume that you worked on this problem for 1 week at $300/day)? Your salary as an engineer is a fixed or variable cost? ACTIVTY