Six-Sigma and the bottom Line

• (i) Develop TR(x), TC(x) and  (x) as functions of x, where

TR is the total revenue of the company per quarter, TC is its
total cost and  represents its profit (before the cost of capital
and taxes) per quarter. Clearly identify the domain of each of
these functions.
• Solution:

• At a price of Rs. 1000 per unit, the demand is only 1000 units
per quarter.

• TR (X) = 1000 X, 0 ≤ X ≤ 1000

• TC (X) = 350000 + 600 X, 0 ≤ X ≤ 2000

•  (X) = -350000 + 400 X, 0 ≤ X ≤ 1000

• (ii) What is the break-even volume for the company?
• Solution:

• At break even volume,  (X) = 0

• Therefore BEV = 350000/400 = 875 units per quarter

• (iii) How much is the unit variable cost for each unit produced
(good or defective)?
• Solution:

• If y is the number of products (good or defective) produced,

then x = 0.9 y

• or y = x / 0.9

• Also, if v is the variable cost for each unit (good or defective)

produced, then v y = 600 x
600x 600x
• Or v    0.9  540
y x
• Hence, v = Rs.540 per unit produced (good or defective)
• (iv) How much was the quality tax paid last quarter?

• Was it higher or lower than the profit generated in the quarter?

• What percentage of the profit was this quality tax?

• Solution:

• Because of defective produce, variable cost per unit increased

from Rs. 540 per unit to Rs. 600 per unit.

• Quality Tax = (600 – 540) x 1000 = Rs. 60000 per quarter

• Since profit generated was Rs. 50000 per quarter, the Quality
Tax was higher than the profit generated.
60000
• In fact, Quality Tax = x100%  120% of profit generated
50000
• (v) Repeat answering questions (i) and (ii) for the company
after the implementation of its successful Six-Sigma program.
• Solution:

• If the defectives produced were eliminated,

• TR (X) = 1000, 0 ≤ X ≤ 1000

• TC (X) = 350000 + 540 X, 0 ≤ X ≤ 2000

•  (X) = -350000 + 460 X, 0 ≤ X ≤ 1000

350000
• and BEV   760.87 units per quarter
460
• (vi) Repeat answering questions (i) and (ii) for the company
after the implementation of its successful Six Sigma program
incorporating the amortized cost of implementing the Six
Sigma program.
• Solution:

• TR (X) = 1000 X, 0 ≤ X ≤ 1000

• TC (X) = 365000 + 540 X, 0 ≤ X ≤ 2000

•  (X) = -365000 + 460 X, 0 ≤ X ≤ 1000

• and BEV  365000  793.48 units per quarter

460
• (vii) What is the percentage increase in profit after the
elimination of the 10% defect rate?
• Solution:

• At X = 1000,  = -365000 + 460000 = 95000

• Increase in profit = 95000 –50000 = 45000

• Therefore percentage increase in profit

45000
 x100%  90%
50000
• (viii) Comment on the financial health of the company before
and after the Six Sigma Program after comparing the TR (x),
TC (x) and  (x) functions.
• Solution: Comparing the result in (i), (ii) and (vi) above,

• We find that the variable cost per unit has fallen from $600 to
$540 per units.

• Although this has been brought about by a corresponding

marginal increase in fixed cost, the BEV has fallen from 875
to 793.48 units per quarter.

• BEV is lower and the contribution per unit is higher showing

the firm is more resilient to demand falls and can exploit
demand increase better.

• Also the effective capacity has gone up from 1800 to 2000

units.
• (ix) Ignoring interest rates, one way to judge an investment is
to calculate the unadjusted rate of return:

Annual Return
ROI  100%
Investment
Increase in profit per quarter
 100% per quarter
Investment

• What is the ROI for the Six Sigma program?

• Solution:

• ROI = [(95000 – 50000) / 15000] x 100 per quarter

• = [45000) / 15000] x 100 per quarter

• = 300% per quarter

• (x) If the company has been selling 1000 units per quarter,
then the profits increase with the implementation of the Six
Sigma program. However, at other volumes, this may not be
the case. Please develop a decision table showing the best
alternative for all possible values of x. Also show the
opportunity loss function if the company considers the Six
Sigma program and decides not to implement it. Again, give
the loss function for the complete domain of x.
• Solution:

• Since the revenue function is common, we can compare only

the cost functions.

• Without Six Sigma, TC0 = 350000 + 600 X, 0 ≤ X ≤ 1800

• With Six Sigma, TC1 = 365000 + 540 X, 0 ≤ X ≤ 2000

• If TC0 = TC1, then 350000 + 600 X = 365000 + 540 X,

• or X = 15000/60 = 250

• For small value of X, TC0 is lower than TC1 and it remain

lower till X = 250, beyond which TC1 is lower than TC0.
• Solution:

• Hence the decision table:

• Interval of X Best alternative

• 0 ≤ X ≤ 250 Without 6
• 250 ≤ X ≤ 2000 With 6

• Finally
TC0 – TC1 = -15000+ 60 X, 0 ≤ X ≤ 250

• L (Without 6, X) = TC1 – TC1 = 0, 250 ≤ X ≤ 2000