Product design & selection process problems solution

University Of central Punjab F14
Production & Operation Management Page 1
Subject:
Production & Operation
Management
Topic:
Solve problems
Assignment No: 2
Submitted To:
Sir Usman Waris
Submitted By:
Ayesha Hamid

Question No 1.
See-Clear Optics is considering producing a new line of eyewear. After considering the
costs of raw materials and the cost of some new equipment, the company estimates axed
costs to be $40,000 with a variable cost of $45 per unit produced.
a) If the selling price of each new product is set at $100, how many units need to be
produced and sold to break even? Use both the graphical and algebraic approach?
b) If the selling price of the product is set at $80 per unit, See-Clear expects to sell 2000
units. What would be the total contribution to profit from this product at this price?
c) See-Clear estimates that if it offers the price at the original target of $100 per unit, the
company will sell about 1500 units. Will the pricing strategy of $100 per unit or $80 per
unit yield a higher contribution to port?
Solution
(a)
Fixed Cost= $40000
Variable Cost= $ 45 per unit
Selling Price= $100
Break Even Quantity =
Fixed Cost
Selling price per unit − Variable cost per unit
$40000
$100 − $45
$40000
$55
Break Even Quantity = 728 units
(b)
Selling Price= $80
Expected Sales (Q) = 2000 units
Contribution to Profit= Total Revenue – Total Cost
Contribution to Profit= SP (Q) – [FC+VC (Q)]
Contribution to Profit= $80(2000) – [$40000+$45(2000)]

Contribution to Profit= $30000
(c)
Selling Price= $100
Expected Sales= 1500 units
Conclusion:
Pricing strategy of $100 per unit yield a higher contribution to profit.
Question No 2.
Med-First is a medical facility that offers outpatient medical services. The facility is
considering offering an additional service, mammography screening tests on site. The
facility estimates the annual fixed cost of the equipment and skills necessary for the service
to be $120,000. Variable costs for each patient processed are estimated at $35 per patient.
If the clinic plans to charge $55 for each screening test, how many patients must it process
a year in order to break even?
Solution
Fixed cost = F.c = $ 12,000
Variable cost = V.C = $ 35
Charges = Selling price = S.P = $55
No. of patients for break even = Q (BE) =?
Patients (B.E)
Fixed Cost
Break Even Quantity = 12000 / (55-35)
Break Even Quantity = 6000 Patients
Question No 3.
Tasty Ice Cream is a year-round take-out ice cream restaurant that is considering offering
an additional product, hot chocolate. Considering the additional machine it would need
plus cups and ingredients, it estimates fixed cost per year to be $200 per year and the
variable cost at $.20. If it charges $1.00 for each hot chocolate, how many hot chocolates
does it need to sell in order to break even?
Solution
Fixed cost = $ 200
Variable cost = $ 1

Selling price = $ 0.2
Breakeven = QB.E = F.c / S.p – v.c
QB.E = 200/ 1 – 0.2 = 250 hot chocolates
Question No 4
Slick Pads is a company that manufactures laptop notebook computers. The company is
considering adding its own line of computer printers as well. It has considered the
implications from marketing and financial perspectives and estimates fixed costs to be
$500,000. Variable costs are estimated at $200 per unit produced and sold.
(a) If the company plans to offer the new printers at a price of $350, how many printers
does it have to sell to break even?
(b) Describe the types of operations considerations that the company needs to consider
before making the final decision.
Fixed cost = F.c = $ 500,000
Selling price = S.P = $ 350
Q (BE) = F .C / (S.P – V.C)
Solution
(a)
Q (BE) = 500000 / (350 – 200) = 3333 units
(b)
Early and later stage of product life cycle operation.
Delivery, flexibility, cost and quality operation.
Resources grouped by function, and function arranged in a line operation.
Make to stock, make to order or assemble to order prearranged in a line operation.
Low and high operation.
Question No 5
Perfect Furniture is a manufacturer of kitchen tables and chairs. The company is
currently deciding between two new methods for making kitchen tables. The first process
is estimated to have a fixed cost of $80,000 and a variable cost of $75 per unit. The
second process is estimated to have a fixed cost of $100,000 and a variable cost of $60
per unit.
(a) Graphically plot the total costs for both methods. Identify which ranges of product
volume are best for each method.
(b) If the company produces 500 tables a year, which method provides a lower total cost?

Solution
Process 1
Fixed Cost= $80000
Variable Cost=$75 per unit
Process 2
Fixed Cost=$100000
Variable Cost= $60 per unit
a) ….
b)
Quantity=500 units
Process 1
Total Cost= Fixed Cost +Variable Cost
TC=FC+VC (Q)
TC= $80000 + (75) (500)
TC=$117500
Process 2
Total Cost= Fixed Cost +Variable Cost
TC=FC+VC (Q)
TC= $100000 + (60) (500)
TC=$130000
Conclusion:
Process 1 provides a lower total cost.

Question No 6
Harrison Hotels is considering adding a spa to its current facility in order to improve their
list of amenities. Operating the spa would require a fixed cost of $25,000 a year. Variable
cost is estimated at $35.00 per customer. The Hotel wants to break even if 12,000
customers use the spa facility. What should be the price of the spa services?
Solution
Fixed cost = F.c = $ 25,000
Customer (BE) = 12,000
Selling price = S.P =?
Q (BE) = F .C / (S.P – V.C)
12,000 = 25,000 / S.P – 35
25000/12000 = S.P – 35
2.083 = S.P – 35
S.P = 35 + 2.083
S.P = $ 37.083
Question No 7.
KaizerPlasticsproducesavarietyof plasticitemsforpackaginganddistribution.One item,
container#145, has had a lowcontributiontoprofits.Lastyear,20,000 unitsof container#145
were producedandsold.The sellingprice of the containerwas$20.00 perunit,witha variable
cost of $18 per unitanda fixedcostof $70,000 per year.
(a) What is the break-evenquantityforthisproduct?Use bothgraphicand algebraicmethodsto
getyour answer.
(b) The companyis currentlyconsideringwaysto improve profitabilitybyeitherstimulating
salesvolumesorreducingvariablecosts.Managementbelievesthatsalescanbe increasedby
35 percentof theircurrentlevelsorthatvariable costcan be reducedto90 percentof their
currentlevel.Assuming all othercostsequal,identifywhichalternative wouldleadtoahigher
profitcontribution.
Solution
Fixed Cost=$70000
Selling Price=$20 per unit
a)
Fixed Cost
$70000
$20 − $18

b)
Increase in Sales=35%
Increased Sales= 20000(1.35) = 27000 units
Loss= $16000
Reduce in Variable Cost= 90%
Reduced Variable Cost=18(0.90) =$16.20
Contribution to Profit= $20(20000) – [$70000+16.20(20000)]
Conclusion:
Reducing variable cost is more beneficial for the company.
Question No 8.
George Fine, owner of Fine Manufacturing, is considering the introduction of a new
product line. George has considered factors such as costs of raw materials, new
equipment, and requirements of a new production process. He estimates that the variable
costs of each unit produced would be $8 and fixed cost would $70,000.
(a) If the selling price is set at $20 each, how many units have to be produced and sold for
Fine Manufacturing to break even? Use both graphical and algebraic approaches.

(b) If the selling price of the product is set at $18.00 per unit, Fine Manufacturing expects
to sell 15,000 units. What would be the total contribution to profit from this product at
this price?
(c) Fine Manufacturing estimates that if it offers the price at the original target of $20 per
unit, the company will sell about 12,000 units. Which pricing strategy–$18.00 per unit or
$20.00 per unit–will yield a higher contribution to profit?
(d) Identify additional factors the George Fine should consider in deciding whether to
produce and sell the new product. Additional line of services to include professional
office cleaning. Annual fixed costs for this additional service are estimated to be $9,000.
Variable costs are estimated at $50.00 per unit of service. If the price of the new service
is set at $80.00 per unit of service, how many units of service are needed for Handy-Maid
to break even?
Solution
(a)
Fixed Cost=$70000
Fixed Cost
$70000
$20 − $8
(b)
Estimated Sales=15000 units

(c)
Selling Price=$20per unit
Estimated Sales=12000 units
Conclusion:
Pricing strategy of $18 per unit will yield higher contribution to profit.
Question No 9
Handy Maid Cleaning service is considering offering an additional line of service to
include professional office cleaning. Annual fixed costs for this additional service are
estimated to be $9000. Variable costs are estimated at $50 per unit of service. If the price
of the new service is a set at $80 per unit of service, how many units of service are
needed for Handy Maid to break even?
Solution
Variable Cost=$50
Selling Price=$80
Fixed Cost=$70000
Break-even Quantity= Fixed Cost / (Selling Price- Variable Cost)
Break-even Quantity = 9000/ (80- 50)
Break-even Quantity =300 units of service
Question No 10.
Easy-Tech Software Corporation is evaluating the production of a new software product to
compete with the popular word processing software currently available. Annual fixed costs
of producing the item are estimated at $150,000 while the variable costs are $10.00 per
unit. The current selling price of the item is $35.00 per unit, and the annual sales volume is
estimated at 50,000 units.
(a) Easy-Tech is considering adding new equipment that would improve software quality.
The negative aspect of this new equipment would be an increase in both fixed and variable
costs. Annual fixed cost would increase by $50,000 and variable cost by $3.00. However,
marketing expects the better quality product to increase demand to 70,000 units. Should

Easy-Tech purchase this new equipment and keep the price of their product the same?
Explain your reasoning.
(b) Another option being considered by Easy-Tech is the increase in the selling price to
$40.00 per unit to offset the additional equipment costs. However, this increase would
result in a decrease in demand to 40,000 units. Should Easy-Tech increase their selling
price if they purchase the new equipment? Explain your reasoning
Fixed cost = F.c = $ 150,000
Variable cost = V.C = $ 10 per unit
Quantity sold = Q = 50,000 units
Solution
(a)
New Fixed Cost = $ 200,000
New Variable cost = V.C = $ 13
Quantity Sold = Q = 70,000
Contribution to profit at old process = C.T.P = TR – TC
TR = 50000 × 35 = 1,750,000
TC = F.C + V.C (Q)
TC = 15000 + 10(50000) = 650000
C.T.P = TR – TC
C.T.P = 1750000 – 650000 = $ 1,100,000
Contribution to profit with new process
TR = 70000 × 35 = $ 2,450,000
TC = F.C + V.C (Q)
TC = 200000 + 13(70000) = 1,110,000
C.T.P = TR – TC
C.T.P = 245000 – 1110000 = $ 1,340,000
So, new process is more profitable.
(b)
Quantity sold = 40,000
Contribution to profit C.T.P = TR – TC
TR = 40(40000) = $ 1,600,000
TC = 1,110,000
C.T.P = TR – TC
C.T.P = 160000 – 111000 = $ 4, 90,000
Profitability decrease 1,340,000 to 4, 90,000.
So, easy tech should not increase its selling price at purchasing of new equipment.

Question No 11.
Zodiac Furniture is considering the production of a new line of metal office chairs. The
chair can be produced in -house using either process A or process B. The chairs can also
be purchased from an outside supplier. Specify the levels of demand for each processing
alternative given the cost in the table.
Fixed Cost Variable Cost
Process A $ 20000 $ 30
Process B $ 30000 $ 15
Outside
Supplier
$ 0 $ 50
Solution
Indifference Quantity between Process A and Process B
Total Cost A= Total Cost B
[FC+ VC (Q)]A= [FC+ VC (Q)]B
The equation rearranges to:
Q = (FCB- FCA)/ (VCA- VCB)
Q = (30000- 20000)/ (30- 15)
Q = 666.7, or 667 chairs.
Process A is better than Process B when demand is below 667 chairs.
Indifference Quantity between Process A and Outsourcing
Total Cost A = Total Cost O
[FC+ VC (Q)]A= [FC+ VC (Q)]O
Q = 20000/ (50-30) = 1000 chairs
Process A is better than outsourcing when demand is over 1000 chairs.
Indifference Quantity between Process B and Outsourcing
Total Cost B = Total Cost O
[FC+ VC (Q)]B = [FC+ VC (Q)]O
Q = 30000/ (50- 15)
Q = 875.14, or 857 chairs.
Process B is better than outsourcing when demand is over 857 chairs.

In summation:
Demand
Ranges
Cheapest
Production
0 to 857 Outsourcing
858 and
more
Process B
Process A is never the best alternative.
Question No 12.
Mop and Broom Manufacturing is evaluating whether to produce a new type of mop. The
company is considering requirements for the mop as well as the market potential.
Estimates of fixed cost per year are $ 40,000, and the variable cost for each mop
produced is $20.
(a) If the company sells the product at a price of $ 25, how many units of product have to
be sold in order to break even? Use both the algebraic and graphical approaches.
(b) If the company sells 10,000 mops at the product price of $ 25, what will be the
contribution to profit?
Solution
(a)
Fixed Cost= $40000
Fixed Cost
$40000
$25 − $20

(b)
Units Sold=10000
Question No 13.
Mop and Broom Manufacturing, from Problem 12, has decided to produce a new type of
mop. The mop can be made with the current equipment in place. However, the company is
considering the purchase of new equipment that would produce the mop more efficiently.
The fixed cost would be raised to $ 500000 per year, but the variable cost would be
reduced to $ 15 per unit. The company still plans to sell the mops at $ 25 per unit. Should
Mop and Broom produce the mop with the new or current equipment described in problem
12? Specify the volume of demand for which you would choose each process.
Solution
It is known from Problem 12, that money is lost if demand is under 8,000 units;
Breakeven between old and new equipment;
Fixed cost = 50,000
Variable cost= 15
Selling price = 25
FC0 + VC0 (Q) = Fan + Van (Q)
40,000+ 20(Q) = 50,000 + 15(Q)
20Q – 15Q = 50,000 – 40,000
5Q = 10,000
Q = 10,000 / 5
Q = 2,000
Use the old equipment if demand is at most 2,000 units. Use the new equipment if
demand is over 2,000 units.
Question No 14.
Jacob’s baby food company must go through the following steps to make mashed
carrots:
(1) Unload carrots from truck
(2) Inspect Carrots
(3) Weigh carrots
(4) Move to storage

(5) Wait until needed
(6) Move to washer
(7) Boil in water
(8) Mash carrots
(9) Inspect
Draw a process flow die gram for these steps.
Solution
Question No 15.
Draw a process flow diagram of your last doctor’s office visit. Identify bottlenecks. Did
any activities occur in parallel?
Solution
Bottlenecks occur during the waiting period. Parallel activities such as lab results or X-
rays may be analyzed during some of the waiting times.

Question No 16
Oakwood Outpatient Clinic is analyzing its operation in an effort to improve
performance. The clinic estimates that a patient spends on average 3 ½ hours at the
facility. The amount of time the patient in contact with staff is estimated at 40 minutes.
On average the facility sees 42 patients per day. Their standard has been 40 patients per
day. Determine process velocity and efficiency for the clinic.
Solution
Average estimated time spend = 3.5 hours
Contact Time = 40 minutes
No. patients facilitated = 42 patients
No. of standard patients = 40 patients
Process velocity = Estimated Time / Time Spend
Process velocity = 210 / 40 = 5.25
Efficiency of clinic = Patients facilitated / standard × 100
Efficiency of clinic = 42 / 40 × 100 = 105%
Question No 17.
Oakwood Outpatient Clinic rents a magnetic resonance imaging (MRI) machine for 30
hours a month for use on its patients. Last month the machine was used 28 hours out of
the month. What was the machine utilization?
Solution
Used time of machine = 28 hours
Available time of machine= 30 hours
Utilization = used time / available time
Utilization = 28 / 30 *100%
Utilization = 93.3%
Question No 18.
Mop and Broom Manufacturing estimates that it takes 4 ½ hours for each broom to be
produced, from raw material to final product. An evaluation of the process reveal that the
amount of time spent working on the product is 3 hours. Determine process velocity.
Solution
Estimating taking hours = 4.5 hours
Evolution time spend = 3 hours
Process velocity = Estimated time / Time spend
Process Velocity = 4.5 / 3 = 1.5 hours

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