Assignment 3 Business Systems for Technicians

Brendan BurrBTEC National Certificate in Electronics

Basic Costing Techniques

Assignment 3 Business Systems for Technicians

Assessing the cost and viability of an engineering activity*Please Note: Tasks 1 and 2 must be completed in full and are compulsory.On successful completion of these tasks you will achieve a Pass in the assessed criteria

Task 3 is Optional On successful completion of this task you will achieve a Merit in the assessed criteria

Assessing the cost and viability of an engineering activity WHAT YOU WILL LEARN IN THIS ASSIGNMENT

You will carry out a basic cost analysis of manufactured products. This is very much an introduction to costing methods but it will give you an appreciation of how important it is for manufacturing engineers to have an understanding of revenue issues.

ASSIGNMENT OBJECTIVES

In this assignment you will need to show that you:

understand how income and expenditure affect the profitability of a business

can carry out calculations involving fixed, variable, direct and indirect costs, and depreciation of assets

can carry out a make-or-buy decision for an identified product

are able to explain some of the strategies that are used to improve the cost-effectiveness of engineering manufacturing processes.

WHAT YOU WILL DO IN THIS ASSIGNMENT

You will carry out a series of costing calculations (preferably using spreadsheets) and use the data generated to influence business decisions.

TASK INTRODUCTION

The main focus of this assignment is to undertake the calculations needed to establish the cost of manufacturing a product or providing an engineering service. This data is then used to inform a make-or-buy decision sometimes it is more cost-effective to buy in a product or service rather that make it yourself, especially if the tooling and set-up costs are considerable. Where the decision is taken to manufacture a product, additional calculations are used to determine the break-even point the number of units which need to be sold to recover overheads and tooling costs.

To achieve the merit criterion, you need to consider how to reduce the cost of an engineering activity without compromising functionality or quality. The concepts of best practice and value engineering are addressed.

TASK 1

Microtronics Ltd manufactures alarm control panels. It has analysed the fixed and variable costs relating to a panel supplied on a subcontract basis to companies who install fire alarm systems. The Econnoline panel has the following data:

Overheads: 18,000

Fixed cost tooling: 2,000

Variable cost per unit: 18

The director of manufacturing requires you to produce an analysis for production volumes in the range of 100 to 1400 per month.

(a) Based on a selling price of 40, construct a break-even chart and use this to find the break-even volume.

(b) Investigate the effect of increasing the selling price to 45.

(c) It is decided to fix the production level at 1000 units a month with each unit selling for 45. A few weeks later Microtronics receives an enquiry from a new customer. This is a DIY store and it wants to place a trial order of 500 units but at the non-negotiable price of 35 per unit. Should the company accept the order given that the average cost per unit based on a 1000 units a month run is 38?

Present all your findings using a spreadsheet.

These tasks provide evidence for grading criterion P6.

TASK 2

A subcontractor produces fuel control valves for the aero industry. The tables below contain information about the cost of producing a particular valve.

Cost of material and parts Quantity Cost per item ()

Aluminium casting (to be machined) 1 18.00

Connector 4 2.00

Spring 2 2.50

Piston 1 8.00

Solenoid actuator (includes seals and fixings) 1 32.00

Limit switch 2 6.40

Other costs

Machining centre purchase price 180,000

Depreciation (straight line p/a) 18%

Machining time per unit 0.5 hours

Machining centre cost per hour (labour, tooling, electricity, etc) 45.00

Assembly time per unit 2 hours

Assembly labour cost per hour 26.00

Test and certification time per unit 0.6 hours

Test and certification labour cost per hour 28.00

Variable overheads (% labour cost) 34%

Fixed overheads (% variable cost) 25%

Production quantity (p/a) 200 to 1600 p/a

The body of the valve is the only part which is machined. This is produced from a bought-in casting. The machining centre currently in use is old and has stopped working and the manufacturing director is keen to replace it with a new one.

The finance director is not convinced that the machine should be replaced given the variable quantities of valve likely to be produced each year, particularly as the casting

supplier has recently set up its own specialised machine shop. The supplier has tendered to supply the valve body fully finished at a guaranteed fixed price of 80 a unit.

Given that valve sales over the next 12 months may not be more than 600 what would be your recommendation:

purchase the machining centre and machine the body?

buy in the body ready finished?

Present a full costing analysis for the valve initially working on a figure of 1000 units per annum using a spreadsheet. Then carry out a what if evaluation using production levels in the range 200 to 1600 units p/a.

Fully justify your recommendations in a memo to the finance and production directors.

This task provides evidence for grading criterion P7.

TASK 3

You work as a value engineer in the manufacturing division of the company producing products similar to the one investigated in task 2.

This type of product has five main elements:

a machined body with pressure connections

a piston which slides within the body and regulates the flow of fuel

springs to control the movement of the piston

an electrical solenoid to move the piston

limit switches to regulate the movement of the piston.

Produce a 500-word report explaining some of the strategies which can be used to improve the cost-effectiveness of producing a manufactured product. Use either the valve detailed above or a product with which you are familiar at your place of work.

This task provides evidence for grading criterion M3.

Task 11a)Break Even Chart

From calculations from the Spreadsheet the company would have to sell 909 units to break even. This would be at a cost of 36,362.00 to the company and a sell price of 40 per unit.1b)Increase of selling price to 45

By increasing the selling price to 45 per unit, the break even point becomes 740 units. This is a significant drop in required units however due to the increase in price less units may be sold.1c)Trial Order Due to the lower price of each unit it was first thought that there would have to be a significant amount of units sold to break even. However due to the Fixed costs being cleared from the manufacturing of the first 1,000 units the last 500 are without any fixed costs whatsoever. The consequence of this is the amount of income from each unit only has the variable costs deducted for the calculation of profit.The profit from the first 1,000 units is 7,000. For creating only 500 more units after the original 1,000 the profit made from the 500 units is 8,500. This indicates it is extremely profitable for the company to make the extra 500 units at a reduced rate of 35.

Task 2From the calculations of the Spreadsheet I have constructed it is clear that there is a good reason to be intuitive about the decision on whether to purchase the part ready made or whether to manufacture the part yourselves.My initial calculations are based on a total of 1,000 units per annum and are as follows.I began by calculating the overall expense of the Cost of Material and Parts compared to the cost of Purchasing the ready made unit.PartQuantityUnit CostTotal Cost

Casting118.0018.00

Connector42.008.00

Spring22.505.00

Piston18.008.00

Solenoid Actuator132.0032.00

Limit Switch26.4012.80

Overall Cost if Produced in house83.80

As you can see from this basic costing the manufacturing of the unit would cost more per unit at 83.80, against the price of 65.80 from purchasing the part ready made.

PartQuantityUnit CostTotal Cost

Casting018.000.00

Connector42.008.00

Spring22.505.00

Piston18.008.00

Solenoid Actuator132.0032.00

Limit Switch26.4012.80

Overall Cost if Bought65.80

The other costs were then included in my calculations and a comparison of manufacture and purchase are shown below.Make

Machining Centre Purchase Price180,000180,000

Depreciation18%32.40

Machining Time per Unit0.5 hours 22.50(Cost per Unit)

Machining centre cost per hour (labour, tooling, electricity, etc) 45.0052.00(Assembly Costs)

Assembly time per unit 2 hours 68.80(The sum of the Assy cost and Test Costs)

Assembly labour cost per hour 26.00

Test and certification time per unit 0.6 hours 16.80(Testing Cost)

Test and certification labour cost per hour 28.00

Variable overheads (% labour cost) 34%23.39

Total Variable Costs198.49

Fixed overheads (% variable cost) 25%49.62

Production quantity (p/a) 200 to 1600 p/a 280.52Cost to make

Purchase

Machining Centre Purchase Price180,0000

Depreciation18%0.00

Machining Time per Unit0.5 hours 0.00(Cost per Unit)

Machining centre cost per hour (labour, tooling, electricity, etc) 45.0052.00(Assembly Costs)

Assembly time per unit 2 hours 68.80(The sum of the Assy cost and Test Costs)

Assembly labour cost per hour 26.00

Test and certification time per unit 0.6 hours 16.80(Testing Cost)

Test and certification labour cost per hour 28.00

Variable overheads (% labour cost) 34%23.39

Total Variable Costs157.99

Fixed overheads (% variable cost) 25%39.50

Production quantity (p/a) 200 to 1600 p/a 197.49Cost to buy

From this it is clear that the total costs to buy would be 197.49 per unit for a total of 1,000 produced units.

The total costs to manufacture would be 280.52 per unit for a total of 1,000 produced units.

This gives an overall difference of 83.03.

The price of the finished part must then be taken into account and deducted from the difference between buying and making the part.

Machined Cast Costs

80.00

Difference in cost between buying and making

83.03

Therefore total saving for buying instead of making is

3.03

This then gives us an overall saving of 3.03 if the part were to be bought ready made rather than if the part were manufactured in house.

This may seem a minimal saving, however when this saving is looked at over the entire 1,000 units it soon becomes clear that there will be a significant saving.

But over 1000 units the saving would be

3,025.00

What If EvaluationBreak Even Data

QuantityDifference in cost between making and buyingDifference in cost of purchaseMake or BuyDepreciation of machinery

200212.63132.63Buy162.00

400131.6351.63Buy81.00

600104.6324.63Buy54.00

80091.1311.13Buy40.50

100083.033.03Buy32.40

120077.63-2.37Make27.00

140073.77-6.23Make23.14

160070.88-9.12Make20.25

110380.000.00Break Even29.37

Above is a chart which compares the differences in the prices when the quantity produced differs.I have already clarified that there will be a saving of 3.03 per unit when the part is bought rather than manufactured, over a quantity of 1,000 units per annum (Shown in yellow).

It would also be feasible to buy in the parts ready made if it was expected that only 600 units would be sold. This is because there would be a saving of 24.63 per unit.

If the company decided to manufacture the parts themselves then it should be anticipated that a minimum of 1103 units would be sold per annum as this is the break even point.

If 1102 parts were sold per annum and the company was making the units, then the company would be making a loss. If 1104 units were sold per annum and the company was making the units, then the company would be making a profit.

To conclude the analysis, if it is truly expected that the company will only sell 600 units per annum then it is a wise decision to buy the valve body fully finished.Task 3By using a method called Value Engineering the production of the fuel control valve can be streamlined and made much more efficient. This works on two main principles, by minimising the number of parts and by minimising the number of processes.

The aim of this method is to reduce the cost of manufacturing each part, whilst maintaining the performance. This is done by looking at the processes and ensuring they are as efficient as they can be.

It makes little sense to have sequential processes at opposite ends of the warehouse. For example having the first process 200 metres away from the stores is not feasible. This would increase the need for transport in the workshop, which would also increase the need for excess space for manoeuvrability of vehicles, wasting time and money.The amount of scrap produced by the company can be decreased by maximising the amount of components produced on a single piece of material. For example any sheet metal components can be positioned in a fashion that makes full use of the whole sheet rather than reserving large areas for a small component.This could be done through CAD packages, if laser cutting is used, or creating new jigs to be used on machinery. The initial outlay may be expensive, but over time savings would be substantial.The massive benefit of this is that money would be saved from no longer having to scrap large amounts of material, and also by using purchased material more efficiently resulting in less material having to be purchased in the first place.Operations used in the processes need to be limited. This will save on time and labour costs which will increase the profitability of the company.

I suggest a review of the manufactured components to see if the design can be altered slightly to provide the same characteristics but at a cheaper cost. For example where fasteners are used in the attachment of the Limit Switches, is it possible and more feasible to use an adhesive to mount the Limit Switch. This would save time on machining holes in the casting and also labour costs in manually attaching the Limit Switches. Currently lots of people would have individual jobs which would be repetitive and monotonous. It would boost workforce moral if a greater range of skills and jobs were available to everyone. By changing the build line to be more efficient this would also become available. This would increase the flexibility of the workforce, keeping the build line productive even when key people (such as Team Leaders, Supervisors and Managers) are out on leave.The layout of the workshop would require a revision. This is because the manufacturing machines, such as milling machines and lathes, would need to be at stage one to produce the Aluminium Casting. Then the casting can be moved straight onto stage two and have the springs, piston and limit switches installed.

The products could be manufactured in a timescale which limits the amount of storage required. For example if 100 units are ordered and 50 units are delivered in two lorry loads then there will be a time where many units will be in storage until all units are made. During this time, it will cost the company money to keep hold of the units. It may be more feasible to deliver 10 loads of 10 units, thus the amount of storage space required would be considerably less.To conclude the company would benefit massively if the build line were streamlined. From an initial outlay in expenses, money could be saved and large profits would be available for the taking.PAGE - 6 -