Question

Palet penerup Case Study 4. Arjang Pottery Inc. Arjang Pottery Inc. is a small manufacturing company that produces custom made decorative clay and porcelain products Sara Tabib the production manager of the figurine department is preparing an annual productivity forecast and wondering whether she should recommend the company to buy a new air-paste molder or add high pressure injectors to improve the productivity of her department. The production data of 2019 and projected data of 2020 are shown in the following table 2019 2020 upgrade machine new machine Production (sets) 2250 X20 2500 3000 Raw material used (mixed clay bags) 350 X6.50 400 450 Labor hours 11000X160 12500 14000 Machinary cost $ 187,500.00 $ 248.750.00 $ 310,000.00 Sara is also aware of the 5% inflation in 2020 compared to 2019 leading to the following changes 2019 2020 Average cost of labour (per hours) 6.50 $ 7.00 Raw material cost (per kg) 160.00 $ 180.00 Sara is primarily concerned about the accounting impact that the new machine can have on her productivity. The productivity change results from acquiring the new air- paste molder that will be paid for with 5% interest over its 10 years life cycle with zero salvage value. Although she sees a growth in production output, Sara wonders which of the two option she should choose and whether the productivity of her department will increase at all. Calling your group into her office she conveys the above information to you and asks you to analyze her productivity. Your group is to required to: 1. Prepare the productivity of all factors. She expects some analysis of single factor productivity for all factors, as well as a multifactor analysis for both years with the change in productivity (+ or - amount). 2. Considering Sara's concern about her machinery cost increase, which option would result in improved productivity? 3. If a 5% productivity improvement is expected in this industry has Sara met this target? 4. If Sara is more in favor of buying the new air paste molder would you dis/approve and why?

Answer 1

1.) 2019 2020 Upgrade 2020 New Machine

Raw material Cost = 56,000 72,000 81,000

(350*160) (400*180) (450*180)

Labour Cost = 71,500 87,500 98,000

(11000*6.5) (12,500*7) (14,000*7)

Interest on Loan = - - 15,500

Total Cost of production 127,500   159,500 194,500

Cost per labout hour 56.67 63.80 64.83

(127,500/11000) (159,500/12,500) (194,500/14000)

2.) even though the buying of new machine is high cost it also results in high productivity increase and hence Sara should go for purchasing new machine

3.) If the existing machine is upgraded, it results in 11.11% (2500-2250)/2250 increase in productivity and if the new machine is purchased, it results in 33.33% (3000-2250)/2250 increase in productivity and hence Sara surpasses the industrial standard

4.) if the market has the capability to absorb all of Sara production, then Sara should go for new machine purchase as it increases productivity by 33.33%