Metters Cabinets, Inc., needs to choose a production method for its new office s
ID: 409194 • Letter: M
Question
Metters Cabinets, Inc., needs to choose a production method for its new office shelf, the Maxistand. To help accomplish this, the firm has gathered the following production cost data: Process Type Annualized Fixed Cost of Plant and Equip. Variable Costs Labor Material Energy Mass Customization $1,260,000 30 18 12 Intermittent $1,000,000 24 26 20 Repetitive $1,625,000 28 15 12 Continuous $1,960,000 25 15 10 Metters Cabinets projects an annual demand of 24,000 units for the Maxistand. The maxistand will sell for $120 per unit. a)Which process type will maximize the annual profit from producing the Maxistand? b)What is the value of this annual profit?
Explanation / Answer
Solution :
Formula for Annual profit = Selling price * no.of units - (Fixed cost + Variable cost * no. of units)
for this data, selling price = $120
no. of units = 24,000
Hence ,
1. Annual profit for mass customizaion process type = 120*24,000 - (1,260,000 + (30+18+12) *24,000)
= 28,80,000 - 27,00,000
= $1,80,000
2. Annual profit for Intermittent process type = 120*24,000 - ( 1,000,000 + (24+26+20) * 24,000)
= 28,80,000 - 26,80,000
= $ 2,00,000
3. Annual profit for Repetitive process type = 120 *24,000 - ( (1,625,000 + (28+15+12) * 24,000)
= 28,80,000 - 29,45,000
= $ -65,000
4. Annual profit for Continous process type - 120*24,000 - ( 1,960,000 + (25+15+10)*24,000)
= 28,80,000 - 31,60,000
= $ - 2,80,000
Answer a) From calculation, it is obvious that Intermittent process type will maximize the profit from producing the Maxistand.
Answer b) The value of annual profit is $ 2,00,000
Moreover by selecting repetitive and continous process type, Creative Cabinets, Inc will incur losses of $ 65,000 and $ 2,80,000 respectively.