Theory of constraints

Superspeed Motors Ltd. manufactures precision engine blocks for high performance cars. The engine block is the major component of an automotive motor and is usually made from an aluminum alloy.

Superspeed's plant where its engine blocks are made, consists of two departments, Casting and Machining. The molten alloy is first cast into a mold in the Casting Department. The hardened block is removed from the mold and then transferred to the Machining Department where the block is prepared to receive the remaining engine components. The following information provides further details relating to the production process.

Superspeed's annual capacity is 30,000 units in the Casting Department and 20,000 units in the Machining Department.

The cost of aluminum alloy, which is the only direct material is $600 per engine block.

All direct material cost is incurred in the Casting Department.

As there is a high demand for Superspeed's engine blocks, it can sell as many blocks as it produces at a selling price of $1,400 per unit.

Annual fixed costs of operations:

oCasting: $850,000

oMachining:$685,000

(Note: unit = engine block)

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, she would like you to compute the following:

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

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

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 casting equipment. Adding on the additional equipment will increase the output of blocks casted in the Casting Department by 5%. The rented casting equipment will increase the annual Casting Department costs by $240,000.

Option 2: The company's chemical engineer has suggested the addition of a chemical to the molten alloy. The addition of the chemical will reduce the time to machine each block. Expected capacity increase is 4%. This will result in a 3% increase in the cost of aluminum alloy for all production. Additionally, equipment in the Machining Department will need a $145,000 software upgrade to properly machine the blocks due to the addition of the chemical.

Option 3: Beaver Industries, and external company, has offered to machine casted blocks at a cost of $150 per hour. Each block machined at Beaver Industries will require 3 hours of machining. Beaver industries has excess capacity to machine 600 blocks for the year.

Which option will maximize Superspeed'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)

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