QUESTION 8 - Theory of constraints (12 marks)

Selkirk Industries manufactures the main rotor blades of helicopters. "The blade performs the same function as an airplane's wings, providing lift as the blades rotate."[1] They are made from various materials, including composite aluminum.

Selkirk's plant, where its blades are made, consists of two departments, Machining and Assembly. The Machining Department uses computer-controlled machines to cut and refine the direct materials used to assemble the blade. These materials are then sent to the Assembly Department where the machined materials are assembled into the finished blades.

The following information provides further details relating to the production process.

Selkirk's annual capacity is 4,000 units in the Machining Department and 3,000 units in the Assembly Department.

The cost of direct materials is $10,000 per blade.

All direct material cost is incurred in the Machining Department.

As there is a high demand for Selkirk's rotor blades, it can sell as many blades as it produces at a selling price of $37,000 per unit.

Annual fixed costs of operations:

oMachining: $1,850,000

oAssembly:$985,000

(Note: unit = one rotor blade)

Required

a.Due to the high demand for its product, the production manager is concerned with capacity management and quality. Assuming any defective units produced in either department must be destroyed, he would like you to compute the following:

i.The loss that occurs (per unit) if a defective unit is produced in the Machining Department. (2 marks)

ii.The loss that occurs (per unit) if a defective unit is produced in the Assembly Department. (2 marks)

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b.To address the demand, the plant operations team is looking at short term options to increase plant capacity for the next year. They present you with the following:

Option 1: The operations supervisor has sourced an equipment rental company that will rent out additional computer-controlled machining equipment. Adding on the additional equipment will increase the output of blades machined in the Machining Department by 5%. The rented equipment will increase the annual Machining Department costs by $240,000.

Option 2: The company's design engineer has suggested they change the cutting fluid in the machining process. This will eliminate residue left from the machining operations. Currently, assembly technicians must spend time manually removing the residue at the beginning of the assembly process. If the different cutting fluid is used the expected capacity increase in the Assembly Department is 4%. This will result in a 10% increase in the cost of direct materials for all production. Equipment in the Machining Department will need a $145,000 hardware and software upgrade to accommodate the change in cutting fluid.

Option 3: Aircraft International, an external company, has offered to assemble blades at a cost of $550 per hour. Each blade that Aircraft International assembles will require 32 hours of time. Aircraft International has excess capacity to assemble 200 blades for the year.

Which option will maximize Selkirk's operating profits for the year? Your answer must show all calculations for each option along with net benefits. Also provide one qualitative advantage and one disadvantage for the option you recommend. (7 marks)

Identify one appropriate action the plant operations team should take in the long term to address its capacity issues. (1 mark)

[1] Steam Community :: Guide :: How to build a basic HeliCopter, Accessed, April 15, 2021