In our plant we are producing Product Y. One of the critical parts for the Product Y is Part X.

The number of Part X required for 1 Product Y is 4.

Currently we are producing 5.000 Product Y per month.

Our Current CNC Machine is able to 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 TRY and if sold at the end of 5 years it will be 500.000 TRY.

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 of Product Y. The total demand would be 12.500 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 of the production of Part X.

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

3- Buy a new CNC Machine.

Investment cost of the machine is 3.000.000 TRY 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 TRY

The new machine is able to 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 TRY/hr

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

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

Fixed Overhead per any working day for 1st year (2 or 3 shifts) is 1000 TRY/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 don't have to use all the data given. Be careful.

What is expected from you:

1. Please analyze all possible options that would satisfy the production needs of the plant and list down all alternatives clearly (you should list at least 5 viable alternatives).

2. Prepare Cash Flow tables clearly and calculate Net Present Value for each alternative.

3. Compare and list down the financial and other advantages/disadvantages of alternatives and make a proposal to the Management Team.
4. Make a Variance analysis for a possible order cut that might happen of in year 3-4-5 by 50%. How would your NPV calculations be affected and which alternative would you offer?