Elroy had been with Barnes Machine Company a year since finishing a BS in industrial

engineering (IE). Barnes had been in business for over 50 years, but the company had only

recently moved from Detroit to Gainesville, Georgia. The public reason for the move was the

economics of the old facility. Privately, based on comments he had heard, Elroy believed a

shift to nonunion labor was a larger motive.

Elroy%u2019s boss is the production supervisor, Mr. Hill. Because the plant and the workforce

are new, Elroy has been conducting time-and-motion studies to establish new production

standards. While these were clearly needed, Elroy was impatient to apply other IE tools he

had studied.

One Friday, Mr. Hill asked Elroy to attend a 10 a.m. meeting on Monday. Monday

morning, Elroy was surprised to join not only Mr. Hill and John Blackburn, the head of

manufacturing engineering, but also Mr. Simkins, the head of marketing and several others

from sales and marketing. Most surprising was the attendance of the company%u2019s CEO, Mr.

Barnes, Jr.

The meeting%u2019s purpose was to consider a request for proposal (RFP). As Mr. Simkins

quickly pointed out, the request came from one of Barnes%u2019s most significant customers. The

problem, and the reason for the special meeting, was that a successful bid would exceed

current production capabilities. Mr. Simkins, in summarizing, said, %u201CFortunately Mr. Barnes

was farsighted enough to have our new facility built with room for expansion.%u201D

Mr. Hill agreed: %u201CI see no reason why we should not bid on this proposal. Of course, as

John pointed out, we will need new production capability. While this RFP calls for a fiveyear delivery plan, the total number of parts has not been specified. Since Simkins believes

the data will be available before the final proposal deadline, I suggest that we examine the

economics of the various different manufacturing alternatives. To that end, I intend to have

Elroy here start that study immediately.%u201D

Mr. Barnes ended the meeting with, %u201CI%u2019m sure that not bidding won%u2019t hurt our other

business with them, but they have been a steady customer since my father started the

company and I really would like to help them. Besides, whenever we have added new

manufacturing capacity, Simkins has managed to sell it to someone. So whatever you do,

Hill, don%u2019t let Elroy be too pessimistic. Let%u2019s get on with it. I expect a preliminary evaluation

in two weeks. By the way, John, don%u2019t forget about all that extra equipment we have stored

from the old plant. You may find something there that will help keep the cost down.%u201D

During the next several days, Elroy met several times with Mr. Hill and John Blackburn.

John, who had joined the company after it moved, drove to a warehouse in Atlanta to inspect

the stored equipment. In a meeting Wednesday, John said that only a new engine lathe would

be required.

Hill said, %u201CIf that%u2019s all we need to bid this job, Mr. Barnes will be very pleased. After all,

what will it cost, 15 or 20 thousand?%u201D

%u201CWe can probably find one in that price range, Mr. Hill,%u201D John said, %u201Cbut if we are going

to consider this as a long-term investment that Mr. Simkins will market for us, I think we

should seriously consider one of the automated systems that have become available in the

past few years. Remember, this type of equipment usually lasts a long time. I am sure that it

will still be serviceable long after we complete this contract.%u201D

%u201COK, John, your point is well made,%u201D Mr. Hill replied. %u201CElroy see what you can find that

will do the job. Check with John on the specs, but take a close look at the economics for us.%u201D

During the next few days, Elroy found that there were basically four different possible

machine types that would do the job ranging from the traditional manual engine lathe to a

computer-controlled lathe with robotic load/unload and tolerance checks. From the

manufacturers, he obtained the information contained in Table 10-1.

Table 10-1 Cost Data

Machine Type Purchase Cost

Annual

Maintenance Cost

A. Manual $18,000 $1,350

B. Semiautomatic 27,000 2,430

C. Automatic 64,000 4,250

D. Automatic with

robotic load/unload

120,000 14,400

Machines A and B would each require a full-time operator. A single operator could

service two of Machine type C, and Machine type D would require no operator at all. After

consulting with John about the skill level required, Elroy checked with accounting and found

that an operator would be paid at $14.29 an hour. A 25% incentive is added to base pay for

employees on the second or third shifts. In addition, fringe benefits would run 63% of base

pay, and manufacturing overhead would be assigned at a rate of 47% of the operator%u2019s direct

pay. Accounting had indicated that they would try to classify the equipment in the 5-year life

category for tax depreciation purposes.

Mr. Hill, John, and Elroy decided that the analysis should be based on production runs of

1000 pieces due to uncertain availability of storage space. Elroy noted that each of the

machines has a different production rate and setup procedure. Each manufacturer claims an

expected life of about one million pieces. John pointed out that the machines all use the same

cutting technique, which implies that the tool and material costs should be about the same.

Elroy summarized this in Table 10-2.

Table 10-2 Production Data

Production Rate Material + Tool

Machine

Setup

Cost (Pieces/Hour) Cost/Piece

A $ 750 6 pieces $0.50

B 1000 12 pieces 0.50

C 3000 30 pieces 0.50

D 6000 30 pieces 0.50

John pointed out that there is a part currently purchased from an outside vendor that

could be produced on this equipment. He estimates the setup cost to be about the same and

the production rates to be approximately twice as many pieces per hour for Machine A, about

50% greater for Machine B, and remaining about the same for Machines C and D. Machine

tool and material cost would run about $0.70 a unit.

When Elroy checks with accounting, he finds that they purchased about 7,000 of the parts

last year. Marketing expects that to increase to 8,000 parts this year and remain steady for a

while. Accounting tells him that the average cost per purchased part is $4.26.

In previous economic studies of capital purchases, Elroy has been told to use an interest

rate of 15%. He believes that he should do the same here.

Friday afternoon Elroy sits down to begin his analysis. He knows that everyone at the

meeting next Monday will expect him to have an answer and that it is very likely that his

report will determine whether or not Barnes responds to the RFP.