Question

This is a Business Analytics Question

Written Problem 1

Standard Motor Parts produces fuel injectors for the “after market,” supplying retailers such as Walmart and NAPA Auto Parts. Standard Motor is considering adding a robotic and conveyance system that would bring parts to the welder and send to the next station. Implementation would cost $120,000/year and would replace some existing manual labor positions.[1] Suppose that the facility already had annual overhead costs (facility management, utilities, etc.) of $260,000 and that the new system would lower average variable costs (material and labor) from $11 to $9 per injector.

1. If Standard Motor Parts sells these injectors for $26.95 each:

1. What is the break-even level of production/sales if they choose to implement the new robotic arm and conveyance system? Draw a graph as well to depict this break-even point (depict revenue vs. cost).

2. What if they do not implement the new robotic arm and conveyance system? Determine the break-even level of production/sales in this situation.

2. What annual production level do you need to reach to justify this new robotic & conveyance system (assume that the fuel injectors will sell for the same price regardless of the production system)?

3. What assumptions have we made that have simplified this analysis?

4. If the price remains $26.95/injector, describe what the firm should do in each of the demand conditions below. In each case, be sure to provide evidence to support your answer and compute the profit for your suggested approach.

1. When demand is 20,000 injectors per year

2. When demand is 150,000 injectors per year

Answer 1

Implementation costs per Year	$                             1,20,000
Existing OH costs	$                             2,60,000
Total Fixed costs	$                             3,80,000

A i)

S.P	$                                  26.95
Less: Variable costs	$                                    9.00
Contribution per Motor	$                                  17.95
Break even level of Production/sales if they choose to implement the new robotic arm and conveyance system	Total Fixed costs/ Contribution per motor
Break even level of Production/sales if they choose to implement the new robotic arm and conveyance system	3,80,000/17.95	21,169.92
		21,170	Units

A ii)

S.P	$                                  26.95
Less: Variable costs	$                                  11.00
Contribution per Motor	$                                  15.95
Break even level of Production/sales if they choose to implement the new robotic arm and conveyance system	Total Fixed costs/ Contribution per motor
Break even level of Production/sales if they choose to implement the new robotic arm and conveyance system	2,60,000/15.95	16,300.94
		16,301	Units

B)

annual production level needed to reach to justify this new robotic & conveyance system	(Fixed cost - existing Fixed cost) / Saving in Variable cost per unit
annual production level needed to reach to justify this new robotic & conveyance system	(3,80,000-2,60,000) / 2
annual production level needed to reach to justify this new robotic & conveyance system	60,000	Units

C)

Assumptions that have been made are
No minimum & Maximum level of sales are compulsory
All units would be sold at same selling price
Implementation of new systems would not result in upgrading or degrading in quality of products

D)

As per part B minimum annual sales/production required to justify new systems is 60,000 units'
Therefore for any volume over and above 60,000 units new system will increase profitability & any volume below it would result in decrease of profitability

i)

i) When demand is 20,000 injectors per year = New systems should not be implemented
Volume =	20,000 Units
	Old system continued	New System implemented
S.P	$                                  26.95	$                                          26.95
Variable cost per unit	$                                        11	$                                                  9
Contribution per unit	$                                  15.95	$                                          17.95
*Volume	$                                20,000	$                                        20,000
Total contribution	$                             3,19,000	$                                    3,59,000
Less :
Fixed costs of new systems	$                                         -	$                                    1,20,000
Existing fixed costs	$                             2,60,000	$                                    2,60,000
Profit	$                                59,000	$                                      -21,000
Outcome is New system is not beneficial as mentioned above

ii) When demand is 1,50,000 injectors per year = New systems should be implemented
Volume =	1,50,000 Units
	Old system continued	New System implemented
S.P	$                                  26.95	$                                          26.95
Variable cost per unit	$                                        11	$                                                  9
Contribution per unit	$                                  15.95	$                                          17.95
*Volume	$                             1,50,000	$                                    1,50,000
Total contribution	$                           23,92,500	$                                  26,92,500
Less :
Fixed costs of new systems	$                                         -	$                                    1,20,000
Existing fixed costs	$                             2,60,000	$                                    2,60,000
Profit	$                          21,32,500	$                                  23,12,500
Outcome is New system is beneficial as mentioned above

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