You have been given the following information in order that you can prepare calculations to indicate the benefit to the company’s shareholders of giving division managers full authority to make unilateral decisions about investing in additional production capacity to alleviate production bottlenecks:
- The company’s Carlow Division manufactures two types of external hard drive
- Production of each external hard drive requires a sequence of three manufacturing operations (identified here as Processes 1, 2 and 3, which must be carried out in that order). The total available capacity of each process (per annum) is as follows:
Process 1 Process 2 Process 3
27,500 hours 15,000 hours 15,000 hours
- All production costs are fixed, apart from direct materials.
- No stocks of finished goods or work-in-progress are held.
- Summary of resource requirements and market data for each product:
Drive Y Drive Z
Process times, per unit of each hard drive:
- Process 1: 4 minutes, 5 minutes
- Process 2: 1 minute, 4 minutes
- Process 3: 3 minutes, 4 minutes
Cost of raw materials, per drive:
- in Process 1: €7, €10
- in Process 2: €8, €12
- in Process 3: €9. €13
Selling prices: €45 for Drive Y, €60 for Drive Z
Maximum demand per annum:
180,000 units for Drive Y, 150,000 units for Drive Z.
- An immediate investment of €2,500,000 would be required in order to purchase additional production equipment which would eliminate the bottleneck. Assume that this additional equipment would have a 4-year life and that it would increase fixed overheads (excluding depreciation) by €600,000 during each year of its life. The cost of capital is 10% per annum.