Chad Curtis

Operations Management 485

HW Chapters 1 & 2

March 6, 2016

Chapter 1 Problems

1.1 If the cost of manufacturing (direct material and direct labor) is 60% of sales and profit is

10% of sales, what would be the improvement in profit if, through better planning and

control, the cost of manufacturing was reduced from 60% of sales to 50% of sales.

Before Improvement After Improvement

Dollars % of sales Dollars % of sales

Revenue (Sales): $1,000,000 100 $1,000,000 100

Cost of Goods Sold:

Direct Material & Direct Labor: $600,000 60 $500,000 50

Overhead: $300,000 30 $300,000 30

Total Cost of Goods Sold: $900,000 90 $800,000 80

Gross Profit: $100,000 10 $200,000 20

Improvement of profit is 100% because it has doubled from 10% of sales to 20% of sales.
1.2 In Problem 1.1 how much would sales have to increase to provide the same increase in

profits?

Profit = sales – (direct material + direct labor + overhead)

= sales – (0.6 sales + 0.3)

= sales – 0.6 sales – 0.3

0.2 = 0.4 sales – 0.3

0.4 sales = 0.5

sales = 0.5/0.4 = 1.25

Sales must increase 25% to give the same increase in profit.

1.5 Amalgamated Fenderdenter’s sales are $10 million. The company spends $3.5 million for

purchase of direct materials and $2.5 million for direct labor; overhead is $3.5 million

and profit is $500,000. Direct labor and direct material vary directly with sales, but

overhead does not. The company wants to double its profit.

A. By how much should the firm increase sales?

Profit = sales – (direct material + direct labor + overhead)

= sales – (0.35 sales + 0.25 sales + 0.35)

= sales – 0.6 sales – 0.35

0.1 = 0.4 sales – 0.35

0.4 sales = 0.45

sales = 0.45/0.4 = 1.125

The firm should increase sales by 12.5%

B. By how much should the firm decrease material costs?

Before Improvement After Improvement

Dollars % of sales Dollars % of sales

Revenue (Sales): $10,000,000 100 $10,000,000 100

Cost of Goods Sold:

Direct Material: $3,500,000 35 $3,000,000 30

Direct Labor: $2,500,000 25 $2,500,000 25

Overhead: $3,500,000 35 $3,500,000 35

Total Cost of Goods Sold: $9,500,000 95 $9,000,000 90

Gross Profit: $500,000 5 $1,000,000 10

The firm should decrease material costs by $500,000 for a total of $3,000,000.

C. By how much should the firm decrease labor cost?

Before Improvement After Improvement

Dollars % of sales Dollars % of sales

Revenue (Sales): $10,000,000 100 $10,000,000 100

Cost of Goods Sold:

Direct Material: $3,500,000 35 $3,500,000 35

Direct Labor: $2,500,000 25 $2,000,000 20

Overhead: $3,500,000 35 $3,500,000 35

Total Cost of Goods Sold: $9,500,000 95 $9,000,000 90

Gross Profit: $500,000 5 $1,000,000 10

The firm should decrease labor cost by $500,000 for a total of $2,000,000.
2.8 A company wants to develop a level production plan for a family of products. The

opening inventory is 450 units, and a decrease to 200 units is expected by the end of the

plan. The demand for each of the periods is given in what follows. All periods have the

same number of working days. How much should the company produce each period?

What will be the ending inventories in each period? Do you see any problems with the

plan?

Total production required = 5,600 + 200 – 450 = 5,350 units

Ending inventory is 200 units

Period 1 2 3 4 5 6 Total
Forecast Demand 1300 1200 800 600 800 900 5600
Planned Production 1025 1025 825 825 825 825 5350
Planned
450 175 0 25 250 275 200
Inventory

The only problem I see with this plan is production staying efficient during period 1 & 2

with have to produce a greater amount than the rest of the periods. The ending inventory

at period 2 is 0 so that could be a problem to not have any in stock, but these periods

already have to produce a greater amount. Depending on production capacity period 1 &

2 planned production could be increased if the department can stay on schedule. Periods

3 – 6 planned production could decrease than if periods 1 & 2 were increased.