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Chapter 22
Measuring and Improving Internal Business Processes
Answer to End of Chapter Exercises

Q 22.1
A B

selling price 37 39
variable cost 15 12
contribution 22 27

Time required A B
units 100 60
time per unit process 1 15 20
time per unit process 2 15 10
Total hours
Total time process 1 (hours) 25 20 45
Total time process 2 (hours) 25 10 35

Time available is 40 hours so there is a constraint on process 1 but not on process 2.

i) Variable and full cost and profit per unit of each product:
A B

Selling price per unit 37.0 39.0
Variable cost 15.0 12.0
Full cost* 19.5 19.5
Total cost per unit 34.5 31.5
Profit per unit 2.5 7.5

* Labour cost of each process is 360 hours for a 40 hour shift = 9 an hour. The overhead is 30 per hour and so
total overheads are 39 per hour. Since each product requires 30 minutes processing the overhead cost per unit is
19.50

ii) Based on profit per unit, product B would be manufactured first, followed by product A.
The constraint process is process 1.
Time in
process 1
Product units (hours) Cumulative time
B 60 20 20
A 80 20 40
60 units of product B would be manufactured plus 80 units of product A.

iii) The optimum production plan will be based on maximising the contribution per limiting factor

A B

Selling price per unit 37 39
Variable cost 15 12
Contribution per unit 22 27
time in constraint area (process 1) 15 mins 20 mins
Contribution per hour in process 1 88 81

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ii) Based on contribution per limiting factor, product A would be manufactured first, followed by product B.
The constraint process is process 1.
Product units time Cumulative time
A 100 25 20
B 45 15 40
Profit at this volume of activity
A B Total

Selling price per unit 37 39
Variable cost 15 12
Contribution per unit 22 27
Number of units sold 100 45
Contribution 2200 1215 3415
Total labour cost 720
Overhead (30 per hour for 80 hours) 2400
Profit 295

iv) The organisation might consider ways of eliminating the constraint on process 1. Since it is not possible
to manufacture sufficient units of product B, there is a lost contribution of 27 per unit or 81 an hour.
Method of increasing throughput through process 1 should be investigated or additional hours should be
worked in process 1.

Q 22.2
Traditional system 3 = 13.8%
3 + .67+ 2 + 16

2 = 26.3%
JIT system 2 + .1 + .5 + 5

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Q 22.3
20X6 20X7
Prevention '000 '000 % '000 '000 %
Employee training 100 120
Preventative maintenance 80 70
Quality circles 100 120
Sub-total 280 6.5% 310 6.9%

Appraisal
Inspecting raw materials 80 70
inspecting w-i-p
inspecting finished goods 70 90
Field testing 90 80
sub-total 240 5.6% 240 5.3%

Internal failure
Scrap cost 100 120
Rework
Lost time 80 75
Disposal costs 130 90
Sub-total 310 7.2% 285 6.3%

External failure
Product recall
Warranty 180 160
Contribution from lost sales
180 4.2% 160 3.6%
Total 1010 23.5% 995 22.1%
Sales 4,300 4500

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Q 22.4
Cost of quality for Arlington Ltd 2007
'000 '000 %
Prevention
Employee training 200.0
sub-total 200.0 4.0%

Appraisal
Inspecting raw materials 25.0
inspecting w-i-p 87.5
inspecting finished goods 87.5
Field testing 50.0
sub-total 250.0 5.0%

Internal failure
Rework 50.0
Scrap cost 112.5
Sub-total 162.5 3.3%

External failure
Product recall 400
Warranty 100.0
Contribution from lost sales 200.0 700.0 14.0%

Total 1312.5 26.3%

Sales 5,000.0

Workings

50
Selling price per unit 30
Variable cost per unit 20
Contribution per unit
Lost sales (units) 10,000
Lost contribution 200,000

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Q 22.5
i) Product A Product B

Material cost 65.00 35.00 (variable cost in short-term)
labour and overhead 52.08 30.42
Full cost 117.08 65.42
Sales price 130.00 70.00
Profit per unit 12.92 4.58

i) Product A Product B

Sales price 130 70
Material cost 65 35
Throughput 65 35

Time spent on products

Minutes
Time for product A Machining Polishing assembly Total
component X (2 units) 20 40
component Y 15 40
Total for product 35 80 10 = 125 @ 25 per hour = 52.1

Minutes
Time for product B Machining Polishing assembly Total
component Y 15 40
component Z 8 0
Total for product 23 40 10 = 73 mins @ 25 per hour = 30.4

ii) Production plan that maximises profit per product will be the one that maximises throughput (sales minus
material cost).

First it is necessary to identify whether there is a constraint

No of No. of No. of
Units units of X units of Y units of Z
Product A 40 80 40
Product B 30 30 30
Total number of
components 80 70 30
Time required: Minutes Hours
machining 800 1050 240 2090 34.8
polishing 1600 2800 4400 73.3
assembly 700 700 11.7
Maximum hours available is 40 hours so there is a constraint on polishing or assembly time, so
need to maximise throughput per time in polishing.
i) Product A Product B

Sales price 130 70
Material cost 65 35
Throughput 65 35
Time in polishing (minutes) 80 40
Contribution per bottleneck minute 0.8125 0.875

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Therefore the optimum production plant that maximises profits per week will occur if all of product B is first
produced and then as much as possible of product A.
Units Polishing time Time remaining
Product B 30 1200 minutes 1200 minutes
Product A 15 1200 minutes 0

Optimum production plan is 30 units of Product B and 15 units of product A.

iii) This is the optimum production plan given assumptions such as the constraint on time available in the
polishing department of 40 hours.

iv) The theory of constraints indicates a need to continuously the constraints in the system and act to
eliminate these constraints.

Q 22.6
(a) How much of the total costs in 20X/8 is value-added, non-value added, or difficult
to classify on that basis?
Answer -
Value added %
Interviewing clients to identify training requirements for agreed future
courses 10
Delivering courses 25
Writing course material 25

Non value added %

Proof reading and correcting errors found in the course material 10
Filing and general administration 20

Difficult to classify
Research for potential new areas requiring training courses 10

(b) If non-value added time could be reduced by 50% what would be the impact on the
operating profit of the bank?
Answer -
It depends
i) Can the non-value added time be changed into value added time and if so how can this be
valued?
ii) If the reduction is achieved through cost cutting then the saving would be potentially 50% x
30% = 15%. It is not clear what costs could be saved however. Presumably salary costs could be
saved but not it is questionable how much of other costs could be saved. 15% x 250,000 =
37,500.

(c) How has the analysis helped the management of South Stone Bank.
Answer
It clarifies how time is being spent. Some information is likely to be better than none. Questions
could be asked about why 30% of time is spent on filing and general administration; what
research for new areas requiring training courses is taking place; why is 25% of time in writing
courses , are these new courses or rewriting old courses

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Q 22.7 Advise the management of Siegmund Ltd on how they might improve the measurement
and performance of their internal business processes.

Internal business processes will cover innovation processes, operations and post sale service.

Time is also a crucial attribute for Siegmund Ltd and the length of the manufacturing cycle
time is a cause of concern.
Process improvement:
Siegmund may consider the potential use of a number of process improvement approaches:
- TQM; Kaizen costing; Business process re-engineering; changing plant layout to a JIT system
from a batch production system; identifying and eliminating constraints using the theory of
constraints; inter-organisational systems (improving linkages with customers and suppliers).

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