Question

Cases CASE 4.1 LANDRY ASSOCIATES CAPACITY ANALYSIS. Landry Associates produces a broad range of components for stereos and similar electronic products. It has been having prob lems with profitability over the past few years. It runs a number of machines that make most of the components, but the machines sit idle a good percentage of the time. Since they are fairly excen. sive machines, Bruce Landry knows that this is the heart of his problem, but even when the lines are staffed, it seems like the factory is down more often than it is working. Landry Associates began as a small machine shop back in the 1970s. It has always believed in treating its workforce well, so it provides employees with paid breaks and lunches. The company loses 816 hours a year for holidays and vacations, which is part of the total idle time. Management tries to get the most out of its machines, however, so it changes them over often to run a new type of component. The orders themselves can be fairly small, ranging anywhere from 5,000 to 100,000 units of one component. Each time a new order is run, the machines have to be set up. In addition, they often run into material problems as the parts that go into making a component can be very small and hard to handle. Consequently, just starting up a run can lead to significant mate- rial problems. The company recently implemented capacity cost management for tracking its plant floor costs. The following table summarizes the information that was gathered for the last 12 months of operation for one of its cost centers, circuit board assembly.

Answer 1

1) Total Managed cost - $ 1635658

Total Hour (Including idle) - 17520

Managed cost/hour = 93.35 (Total Managed Cost/Total Hours)

Total Hour ( only Manned Hours) - 8249.20

Managed cost/hour = 198.20 (Total Managed Cost/Manned Hours)

2) Estimated competitive cost for a good unit

To calculate estimated competitive capacity cost, we have to ignore loss due to non utilisation of capacity. Such loss shall be considered as inefficiency of the organisation.

Cost incurred in pure production shall be the best cost i.e. competitive cost of production for the organisation.

Total cost = Committed + Managed = 848371 + 1635658 = 2484029

Total productive hours (Manned Hours) = 8249.20

Unavoidable Delays / loss (As management policy) when carrying production = 3025.30

Total Hours = 17520

Cost / Hour = 141.78

Total competitive cost = 141.78*(8249.20+3025.30)

= 1598498.61

No. of good units produced = 4949000

competitive cost / unit = 0.3230 approx. (Total competitive cost/No.of good units produced)

3)

Activity / Particulars	Total Hours	Costs	Cost per unit (for 4949000 good units produced)
Total Cost (Committed+Managed)	-	2484029	0.5019
Total Hours (Manned + Idle)	17520	-
Cost per hour		141.78
Idle Capacity (@141.78/hour)	9270.80	13,14,414.02	0.2656
Developmental Activity	153.40	21748.05	0.0044
Internal Failure - cost of quality	113.90	16148.74	0.0033
Material Problems	224.60	31844.21	0.0064
Machine Breakdown	65.80	9329.12	0.0019
Schedules (Preventive Maint.)	13.90	1970.74	0.0004
Changeovers	953.20	135144.70	0.0273
Cleanup	357.80	50728.88	0.0103
Management Policy (Lunch etc.)	928.60	131656.908	0.0266
Material Handling	46.40	6578.59	0.0013
Management Downtime (Miscellaneous)	167.70	23776.50	0.0048

5) Average cost of making a good unit = Total cost / Total no. of good units produced

= 2484029/4949000

=0.5019

6) Assuming that, the product that the given company produces has an unlimited demand i.e. whatever be the no. of units produced by the company, they will be sold in the market, I will suggest that production shall be increased to use the idle capacity of 9270.80 hours. This will more than double the profit of the organisation. Since, in the current situation idle capacity of the organisation is more than utilised capacity.