Please help! Assume you manage an auto repair shop that earns $750,000 per year
ID: 418630 • Letter: P
Question
Please help!
Assume you manage an auto repair shop that earns $750,000 per year in revenues, generating $150,000 per year of profits on overall operating costs of $600,000. Assume your COPQ is 20% of overall operating costs.
What factors or activities may contribute to the COPQ at an auto repair shop?
You and your mechanics have identified projects costing $25,000 (equipment, tools, training) that would likely cut in half the COPQ. What would be your new overall operating costs? What would be your new profit? Explain your reasoning for both answers.
Should you spend the money on these projects? Explain. How much would you be willing to spend on one-time projects intended to cut the cost-of-poor-quality by half for the foreseeable future?
Assume you decided to fund the projects mentioned in Question 3 above but the costs were only reduced by 25%, not by half. Was it still worthwhile? Explain. Remember, you only incur the costs one time but you reap the savings for several years.
Assume the projects were completely successful, cutting the COPQ in half. Explain how this affects your pricing options.
I would appreciate all the help I can get, thank you!
Explanation / Answer
Assume you manage an auto repair shop that earns $750,000 per year in revenues, generating $150,000 per year of profits on overall operating costs of $600,000. Assume your COPQ is 20% of overall operating costs.
Revenue = 750000
Profits = 150000
Op Cost = 600000
COPQ = 20%
Cost = .2*600000 = 120000
What factors or activities may contribute to the COPQ at an auto repair shop?
You and your mechanics have identified projects costing $25,000 (equipment, tools, training) that would likely cut in half the COPQ. What would be your new overall operating costs? What would be your new profit? Explain your reasoning for both answers.
Op Cost = 600000
Poor quality cost = 120000
APC, All op Costs without Poor quality = 480000
NC, With new project cost = 25000
PC, Poor quality cost = 60000
So total op cost = APC+NC+PC = 565000
So new profit = 150000 + 35000 = 185000
Should you spend the money on these projects? Explain. How much would you be willing to spend on one-time projects intended to cut the cost-of-poor-quality by half for the foreseeable future?
As it is clear that these additional costs will lead to reduced overall Op Cost, and hence will lead to lower COPQ and higher profits, it makes perfect sense.
Assume you decided to fund the projects mentioned in Question 3 above but the costs were only reduced by 25%, not by half. Was it still worthwhile? Explain. Remember, you only incur the costs one time but you reap the savings for several years.
With the new scenario :
Op Cost = 600000
Poor quality cost = 120000
APC, All op Costs without Poor quality = 480000
NC, With new project cost = 25000
PC, Poor quality cost = 120000- .25*120000= 90000
So total op cost = APC+NC+PC = 595000
So new profit = 150000 + 5000 = 155000
So, still there is increase in profits and hence is worth the investment, as the profit of 5000 more each year, it makes sense.