Question

A pharmaceutical company manufactured a prescription drug that contained a tablet inside another tablet. This inner tablet, called a “core,” needed to be in the exact center of the larger tablet, and tolerances were measured in tenths of millimeters. The process was not robust, and the placement of the inner tablet sometimes drifted, requiring the scrapping of off-quality product and the adjustment of the tablet press. This resulted in significant scrap and tablet press downtime.

A process change was invented in Japan to correct the problem, using a new process to place the inner tablet in the die of the press that made the outer tablet. There were three of these tablet presses in use in the U.S., but modifications were made to one tablet press as a test. The modification to the first press cost $27,000. During the first batch the modified press ran the entire batch without a quality problem and without quality losses. The batch finished compressing in 16 hours, which was considerably faster than the typical time of 24 hours (however, core centering problems could cause a delay of several days).

Additional test batches were run, all with excellent results. A detailed quality examination proved that the modification performed as desired, reducing variation and nearly eliminating product quality scrap. The other two tablet presses were later modified. The total cost for all modifications, including spare parts, was $90,000.

Over the next year, the results of the change were analyzed. Product yield increased from 92.4% to 96.5%. Because less of the expensive active drug was scrapped and instead became good product, each 1% increase in yield was valued at $2.4 million per year. Operating efficiency improved, resulting in higher output because of less scrap and less downtime due to quality problems. Production plans called for 240 batches to be processed over the year after the tablet press modification was made. This product was produced daily, but production was reduced from three shifts to two because of the improved efficiency. Production planning could now plan effectively; they knew that a batch could be processed in two shifts, not one to five days.

Year-end accounting showed $10 million saved in the first year. Because the product’s patent was about to expire, production was expected to be greatly reduced beyond this time.

QUESTIONS TO CONSIDER

1. One year of production had a value of $240 million. What is the value of one batch of product?

2. How many batches needed to be produced to break even on the initial $27,000 investment? (Assume all batches improved the yield by 4.2%. Do not consider the time value of money.)

3. If the first-year savings is considered to be a single end-of-year cash flow, and the entire $90,000 investment is considered to occur at time 0, what is the present value of the project? Assume an interest rate of 15%.

4. If one batch is produced per day, how often are the savings actually compounded?

5. Does a company face any ethical considerations when it improves process efficiency resulting in lost labor hours for employees? Discuss and explain.

Answer 1

a 000. "yover the million 74.2% results in Answer: Summarized the information provided in the question, A pharanaceutical co., manufactured poescription doug that contained 1) One year of production had a value $340,000, year batches produced 240 Value of one batch $10,00,000 2) PRODUCT YIELD INCREASE from 92.4.4. TO 96.564 4.147 → one percent increase results in 9.4 $24,00,000 $24,00,000x 412 $10,080,000 3) CALCULATION of pl. RATIO - Change in 'PROFIT/CHANGE in sales x 100 310080000/240000000 7100 4.2.1. JCALCULATION OF PRESENT VALVE of pooject PV of inflow 10000000X0.86957=$5695700 PV of cash out flow = $90,000 Net Benefit $ 8,65,700 calculation of break even point- initial cost 27000 = 642857 4.2.1. PU ratio

5) If one batch is produced daily the ③ saving should be actually compounded on daily basis. 6) Yes, the company would face ethical consideration when it impooves, poocess effeciency resulting in loss of labor houros. & As one batch complete in lchts than 24 hos before resulting in shis less for one batch resulting in teduction in shifts from 3 to a requires one third of less labor which is serious is to be considered. the company can plan of another product manufacturing associated with existing one having demand in the masket otherwise they have to free the labor which is against ethical consideration. *** Please - please kindly Op-vote. It helps me, thank you