In our factory we are producing Product X.

Currently we are producing 20.000 Product x per month.

Our Current CNC Machine can produce 65 Part X per hour with a defect rate of 10%.

We are currently running our machine 20 days a month, 2 shifts a day, 9 hours per shift.

Our current machine is 10 years old and does not have any net book value.

Disposal value of the machine is currently 1.500.000 $ and if sold at the end of 5 years it will be 500.000 $.

We received an additional order that would bring 7.500/month for Product Y on top of 5000/month for the upcoming 5 years.

The problem we need to tackle is to supply enough number of Part X for the total demand. The total demand would be 50.000 Product Y per month for the next 5 years.

We have three options or any viable combination of these options:

1-Increase the number of shifts from 2 to 3.

In 3-shift pattern, plant can work 22 days a month, 3 shifts a day, 7,5 hours per shift.

In 3-shift pattern, the defect rate of the current machine rises to 25%.

2- Outsource some or all the production of Part X.

Cost per part for 1st year is 7 $/part (including freight costs, etc.).

3- Buy a new CNC Machine.

Investment cost of the machine is 3.000.000 $ and useful life is 5 years and depreciation method is straight line

over useful life.

The Disposal value at the end of 5 years is 1.500.000 $

The new machine can produce 85 parts per hour with a defect rate of 5% and can be run

in 2-shift or 3-shifts without any impact on defect rate.

The new machine will not impact fixed overhead costs.

Cost Parameters:

Labor cost per hour for 1st year is 25 $/hr.

Material Cost per part for 1st year is 3 $/part

Variable Overhead per hour for 1st year is 10 $/hr.

Fixed Overhead per any working day for 1st year (2 or 3 shifts) is 1000 $/day

Yearly Inflation is 10% for all cost drivers including material cost and outsource cost.

MARR: 20%

Assumptions:

Assume that every month in a year has the same working days as indicated in the question

(for 2 shifts, 20 days and for 3 shifts, 22 days).

You are expected to produce and/or buy the exact amount required to satisfy the monthly demand.

You are not allowed to make stock. If needed, you can close some days in a month to balance

capacity and demand. You can ignore <1% over production and do not make any stock calculations.

There are no Quality or Lead Time concerns and no machine failures

No overtimes possible.

Assume that defect parts have no scrap value

Note: Some of the data given may be irrelevant to the solution. You do not have to use all the data given. Be careful.