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Cost and Profit Figures for Producing one Unit of Each of the Different Types of Cell Phones

Essay by review  •  February 12, 2011  •  Research Paper  •  754 Words (4 Pages)  •  767 Views

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ii. Cost Analysis

There are four costs associated with producing the different types of cell phones. First of all, there is the cost of raw materials; this varies depending on the type of phone. Secondly, there is the cost of labor. This remains constant at 2Dhs per minute; however, the time it takes to manufacture each type of phones differs. In both these cases, the expenses are higher for special order phones. Thirdly, there is an inventory cost of 10Dhs per unit stored which is applicable to any type of phone and lastly, a back order cost is incurred for every unit which is not shipped on time. This cost is irrelevant for consumer phones as the total demand does not have to be met fully and units can be sold at any level up to the market demand. For commercial phones, back order costs are 10Dhs per unit not shipped on time, and 15Dhs per unit for all special order phones. Once an order has been accepted, the producer assumes full responsibility to ship the phones on time so as to avoid paying this penalty charge.

The following table summarizes the cost and profit figures for producing one unit of each of the different types of cell phones. All figures are in Dhs and do not take into account the cost of machine setup time (2400Dhs for commercial phones and 3600Dhs for the rest).

Labor cost Raw material cost Selling price Net Profit

consumer 8 30 55 17

commercial 6 30 50 14

top-of-the-line 16 75 120 29

medium 12 65 110 33

regular 8 55 100 37

As seen above, the special order phones are the most profitable, with regular phones pocketing as much as 37Dhs per unit produced, providing no inventory or back order costs have been incurred.

iii. Capacity Data

The machine center is currently being operated by several employees, 24 hours a day, 8 hours per shift, for 20 days each month. This results in a maximum of 480 hours available for production each month. Nevertheless, it must be noted that the machine needs to be setup for each type of cell phone manufactured, and this takes 20 hours to make commercial phones and 30 hours for any other type of phone. This means that if at least one unit of each type of phone is being produced, starting with any type except for commercial phones, then realistically speaking, the maximum capacity for production is only 370 hours per month.

Operations Strategy

The operations strategy put into place over the 5 periods in questions has been kept simple and clear-cut regarding accepting/rejecting orders, production sequencing and the use of inventory/backorders. Decisions were based entirely on the data analysis pertaining to the demand, cost and capacity restrictions as discussed above. The strategy implemented the following decision policies: Accept as many orders

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