Landry Associates produces a broad range of components for stereos and similar electronic products. It has been having problems with profitability over the past few years. It runs a number of machines that make most of the components, but the machines sit idle a good percentage of the time. Since they are fairly expensive machines, Bruce Landry knows that this is the heart of his problem, but even when the lines are staffed, it seems like the factory is down more often than it is working.

Landry Associates began as a small machine shop back in the 1970s. It has always believed in treating its workforce well, so it provides employees with paid breaks and lunches. The company loses 816 hours a year for holidays and vacations, which is part of the total idle time. Management tries to get the most out of its machines, however, so it changes them over often to run a new type of component. The orders themselves can be fairly small, ranging anywhere from 5,000 to 100,000 units of one component. Each time a new order is run, the machines have to be set up. In addition, they often run into material problems as the parts that go into making a component can be very small and hard to handle. Consequently, just starting up a run can lead to significant material problems.

Landry Associates began as a small machine shop back in the 1970s. It has always believed in treating its workforce well, so it provides employees with paid breaks and lunches. The company loses 816 hours a year for holidays and vacations, which is part of the total idle time. Management tries to get the most out of its machines, however, so it changes them over often to run a new type of component. The orders themselves can be fairly small, ranging anywhere from 5,000 to 100,000 units of one component. Each time a new order is run, the machines have to be set up. In addition, they often run into material problems as the parts that go into making a component can be very small and hard to handle. Consequently, just starting up a run can lead to significant material problems.

REQUIRED:

Using the information in this table, help management answer the following questions. Suggestion: Generate a capacity report; it will help you answer these questions in an organized fashion.

a. What is the managed capacity cost per hour? Committed capacity cost per hour?

b. What is the estimated competitive capacity cost for a good unit?

c. What is the total cost of each of the nonproductive activities? What amount of the total costs is chargeable to idle capacity?

d. What are these costs on a per- unit basis?

e. What is the total average cost for making a good unit?

f. What recommendations would you make to management to improve profitability?

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Summary of Nonproduction Hours Operational A ssumptions Developmental 153.4 Number of lines 2 Internal Failue -Cost of Quality Total Capocity Cyde time 113.9 17,520 Hours per year Naterial Problems 224.6 3.8 Seconds per Unit Nachine Breakdowns 65.8 Good units 4,949,000 Scheduled (Preventive Maint.) 13.9 Changeovers 953.2 Financial A ssumptions deanup 357.8 Committed $s $848,371 Mgt. Policy (Lunch, Allowance) Material Handling 928.6 Manoged Ss $1,635,658 46.4 Ngt. Downtime (Nisc.) 167.7 3,025.3 Capacity Distribution Monned hours 8,249.2 Idle hours 9,270.8 Total hours 17,520.0