easy one

Case Study Current Time Period September 2XX2

You are a relative of the owner(s) of a small Bike (Bicycle) shop with a unique single style product line. The product line includes 5 different size bikes for both girls and boys. . The owner(s) have just discovered that the office space next to the Bike shop will be available at a monthly rent of $8200 per month effective January 2XX3. This additional floor space will double the owner(s) current floor space. Using the Operation Management (OM) techniques in your textbook, at a minimum, provide your recommendations for:

1. Should the owner(s) expand and what effect would this expansion have on current cost/expenses, the breakeven point, etc.?

2. What could the owner(s) do to improve their current operations?

Use the data contained in this case study and the result of your homework (Bile Problems)

Given/Situation/Assumptions

· Cost for expansion would be minimal ($4000 to install a 7’x 6’ door) if done during January and February. The cost for additional storage, openings, shelves and tooling are extra.

· Employees

- 1 Store Clerk – Their salary is part of fixed cost

- 1 Production/assembler – Their salary is part of variable cost

- 5 Part Time workers

- 1 Store Manager (owner) – Their salary is part of fixed cost

Allocation of the Store Manager time: Repairs 25%

Books 40%

Approximate percentages Help with the front 35%

· Employees’ Hours

· Store Clerk Tuesday thru Saturday

· Production/assembler Tuesday thru Saturday

· Located in a strip mall (Western St. Charles County)

· Current floor space 2000 square feet (54 x 40’)

· The owner(s) has no current monthly/yearly forecast or manufacturing schedule.

· Stores Hours

· Monday 2:00 p.m. to 7.00 p.m.

· Tuesday thru Friday 10:30 a.m. to 7:00 p.m.

· Saturday 9:30 a.m. to 6:00 p.m.

· Sunday 12:00 p.m. to 3:00 p.m.

Scheduling and Inventory Data

· Current maximum storage: - 75 finished bikes (w/o expansion) and no subassemblies

- With expansion maximum of 200 bikes and some subassemblies.

If the month ending inventory exceeds 75 bikes (w/o expansion) then the variable cost (VC) per bike will increase by $50 per month per bike (CYX2 $) for every bike in excess of 75 bikes. (Inventory Method FIFO)

· The desired month ending inventory is 45 to 75 bikes except for December and January.

· Ending inventory at the end of December X1 was 25 bikes.

· The number of bikes sold between January and August is 2342 bikes. (See attached data)

· Desire ending inventory at the end of December X2 is 25 to 40 bikes.

· For planning purpose assume the average number of assembly days in a month is 22 days (less Saturday).

· Maximum overtime per month is 50 hours for the assembler.

· Each full time employee receives 6 paid holidays per year.

· Each full time employee receives 3 weeks paid vacation per year however 2 of the 3 weeks must be taken in either January or February.

Sale and Demand Data

	Bike Sales
Jan-X0	80
Feb-X0	76
Mar-X0	300
Apr-X0	320
May-X0	380
Jun-X0	400
Jul-X0	350
Aug-X0	330
Sep-X0	280
Oct-X0	286
Nov-X0	380
Dec-X0	500
Jan-X1	86
Feb-X1	80
Mar-X1	310
Apr-X1	326
May-X1	394
Jun-X1	410
Jul-X1	356
Aug-X1	342
Sep-X1	294
Oct-X1	304
Nov-X1	376
Dec-X1	494
Jan-X2	78
Feb-X2	92
Mar-X2	316
Apr-X2	340
May-X2	400
Jun-X2	412
Jul-X2	358
Aug-X2	346

ROP – EOQ – EPQ data

· Current daily production rate is 8 bikes per an 8 hour day

· Set-up, Re-order and Holding cost are included in the Fixed or Variable cost

For EOQ or EPQ calculation use:

· Average Re-order Cost $30.00 per order

· Average Holding Cost 5% of the item unit cost

· Manufacturing Set-up Cost 5% of the total labor cost

i.e. If the labor cost was 1 hours x $25.00/hr = $25 total labor cost, then the Set-up cost would be $1.00 ($25 x .05).

If the unit/variable costs were $160, then the holding cost would be $8.00 ($160 x 0.05).

.

· For EPQ calculation use a maximum production (p) of 9 bikes

· Total yearly demand and daily usage rate is a function of the bike forecast. Assume an evenly distribution between the 10 different bikes (5 sizes x 2 – boys & girls).

Wages CYX2

· Production Worker hourly rate (includes taxes) $15.00 per hour

· Production O/H rate: based on 1912 hours (approx. 48 weeks x 40 hours) $10.00 per hour

· Part Time worker hourly rate (includes taxes) $10.00 per hour

· Overtime Premium hourly rate (all full time workers) (includes taxes) $ 6.50 per hour

Additional cost above straight hourly rate

· Production hourly rate $25.00 per hour

· Part Time worker hourly rate $12.50 per hour

· Repair hourly rate $35.00 per hour

· Mark-up rate on spares parts (material items only) 1.50 times cost of the part

CYX2 Variable Cost per Bike $340.00

The average variable cost per bike:

Labor $ 25.00

Material $315.00

Total Variable Cost @cost $340.00

Includes production worker straight time salary

Excludes any overtime pay and part- time worker pay

Excludes any additional storage or inventory cost.

Average CYX2 Sell Price per Bike $450.00

Fixed Cost Data

· Utilities $12,000 CYX1

· Advertisement $10,000 CYX1

· Supplies and other expenses $15,000 CYX1

· Production Misc. Material $13,000 CYX1

· Offline Storage cost (for excess inventory) $18,000 CYX1

· Rent $96,000 CYX2

· Store Clerk Salaries and taxes * + $46,000 CYX2

· Profession Services $40,000 CYX2

· Health Insurance $65,000 CYX2

· Other Insurance $20,000 CYX2

· Store Manager Salary and taxes * $70,000 CYX2

· Production Worker vacation & holiday pay $ 4,200 CYX2

· Production Worker non productive activities $ 6,750 CYX2

· Total Fix Cost for CYX1/X2 $415,950

+ Includes overtime pay to store clerk.

* Includes vacation pay

Other Data

· Current production standard to assemble a bike is 60 minutes

· Efficiency Rate (Manufacturing Variance or Productivity Rate)

Production/Assembler Worker 1.000 1 bike per 60 minutes

Store Clerk 1.10 1 bike per 66 minutes

Store Manager (owner) 1.10 1 bike per 66 minutes

Part Time Worker 1.25 1 bike per 75 minutes

· Inflation data

Inflation rate from CYX1 to CYX2: 2.5% or 1.025

Inflation rate from CYX2 to CYX3: 2.5% or 1.025

· Sales growth between CYX2 to CYX3: 2.0% or 1.02 (Assumes no expansion and

based on sell price of $461.25 for CYX3)

Sales growth is the result of a growth in the region population of kids and young families

New Business assumptions: (Applicable to Expansion Options only)

Assumptions:

a. Net Revenue (Sales Revenue – Variable Cost) = $35,000 in Cyx3 dollars with additional advertisement

b. Net Revenue (Sales Revenue – Variable Cost) = $15,000 in Cyx3 dollars with no additional advertisement

c. No additional fix cost is required except for one time fix cost of $10,000 in CYX3 dollars

d. The supplemental business can complementally the bike business and must offset bike business off seasonal business.

e. The store owner repair activity is reduced by 50%. The bike assembler will assume this effort. This means that only 87.5% of the assembler time is spent building bikes.

f. Space requirement must not exceed 750 sq. feet.

Additional case Study requirements:

a. Develop a floor layout assuming expansion (see bike problem #5b)

Current average sale price for CYX2 is $275 per bike.

Assume that the sell price of the bike will affect your yearly demand. The table below is based on CYX2 Economic and CYX2 Sales forecast.

Yearly Forecast�

Base %

(Function of Forecast)�

Average Sell Price�

Base % (Function

of Price)�

�

1920�

0.500�

$700�

1.455�

�

2640�

0.688�

$650�

1.364�

�

2940�

0.766�

$600�

1.273�

�

3250�

0.846�

$550�

1.182�

�

3550�

0.924�

$500�

1.091�

�

3840�

1.000�

$450�

1.000�

�

4150�

1.081�

$400�

0.909�

�

5000�

1.302�

$350�

0.818�

�

5800�

1.510�

$300�

0.727�

�

Assume that the forecast would not be effected by normal escalation of the sale price (i.e. CYX2 of $550 versus CYX3 of $563.74).