- 15 Marks
Question
Yaro Ltd makes two types of solar panels at its manufacturing plant: Red panels for commercial customers and Black panels for domestic customers. All panels are produced using the same materials, machinery and a skilled labour force. Production takes place for five days per week, from 7am until 8pm (13 hours), 50 weeks of the year. Each panel has to be cut, moulded and then assembled using a cutting machine (Machine C), a moulding machine (Machine M) and an assembly machine (Machine A).
As part of a government scheme to increase renewable energy sources, Yaro Ltd has guaranteed not to increase the price of Black or Red panels for the next three years. It has also agreed to supply a minimum of 1,000 black panels each year to domestic customers for this three-year period.
Due to poor productivity levels, late orders and declining profits over recent years, the Finance Director has suggested the introduction of throughput accounting within the organisation, together with „Just in Time‟ system of production.
Material costs and selling prices for each type of panel are shown below.
| Red panels | Black panels | |
|---|---|---|
| ₦ | ₦ | |
| Selling price per unit | 12,600 | 3,800 |
| Material costs per unit | 4,300 | 1,160 |
Total factory costs, which include the cost of labour and all factory overheads, are ₦12million each year at the plant.
Out of the 13 hours available for production each day, workers take a one hour lunch break. For the remaining 12 hours, Machine C is utilised 85% of the time and Machines M and A are utilised 90% of the time. The unproductive time arises either as a result of routine maintenance or because of staff absenteeism, as each machine needs to be manned by skilled workers in order for the machine to run. The skilled workers are currently only trained to work on one type of machine each. Maintenance work is
Answer
Throughput accounting ratio = throughput return per factory hour/cost per factory hour.
| Cost per factory hour | ||
| Total factory costs/total available hours on bottleneck resource | ||
| = ₦12,000,000/2,700 hours (12 × 5 × 50 × 90% hours) =₦4,444.44 |
| Red panels | Black panels | |
|---|---|---|
| ₦ | ₦ | |
| Selling price | 12,600 | 3,800 |
| Materials | (4,300) | (1,160) |
| Throughput per unit | 8,300 | 2,640 |
| Hours per unit required on Machine M | 1.4 | 0.6 |
| Hours per unit required on Machine M | 1.4 | 0.6 |
| Throughput return per hour | ₦5,928.57 | ₦4,400 |
| Throughput accounting ratio | ||
| Throughput return per factory hour/cost per factory hour: | 5,928.57/4,444.44 | 4,400/4,444.44 |
| = 1.33 | = 0.99 |
In any organisation, one would expect the throughput accounting ratio to be greater than 1. This means that the rate at which the organisation is generating cash from sales of this product is greater than the rate at which it is incurring costs. It follows on, then, that if the ratio is less than 1, changes need to be made quickly. Whilst the ratio for Red panels is more than 1, it is just under 1 for Black panels. However, if changes are made as suggested in (c) below, this could soon be rectified.
b. Optimum Production Plan using the Throughput Analysis:
| Product | No. of Units | Hour per unit on Machine | Total Hours | Throughput per hours (N) | Total throughput return (N) |
|---|---|---|---|---|---|
| Black Panel (Limited to contract) | 1000 | 0.6 | 600 | 4,400 | 2,640,000 |
| Red Panel (Balance) | 1500 | 1.4 | 2100 | 5,928.57 | 12,449,997 |
| Less total costs | 2,700 hours | 12,000,000 | |||
| Profit | 3,089,997 |
c. Increasing throughput without additional investment in Machinery
Generally speaking, throughput can be increased by increasing sales volumes or prices on the one hand, or by cutting costs on the other hand. In the case of Yaro Ltd, it is not possible to increase sales prices as the company has guaranteed not to increase them for three years. From our answer to (b) above, we can see that Yaro Ltd has unsatisfied demand for both Black panels and Red panels. There are customers out there who the company is unable to supply because of its restricted machine capacity.
Therefore, it would be worthwhile for Yaro Ltd to focus on increasing production volumes and thus sales volumes.
In order to increase production volumes without making any additional capital expenditure, the company needs to focus on how it could increase the productivity of Machine M. We are told that there is plenty of spare capacity on Machine C and A. Some suggestions to increase Machine M‟s capacity are as follows:
Machine M is currently only fully functional 90% of the time. This means that 300 hours of time are lost whilst the machine is being maintained or workers are not available to man it. If the maintenance work could be carried out outside the usual working day (i.e either before 7 am or after 8 pm), some additional time could be freed up. This should be possible given that we are told that the maintenance contractors work around the clock.
Workers could be trained to use more than one of the machines. This would then mean that, if some workers were absent, one of the other workers could step in and work on another machine in order to keep it running. Again, this would help to keep the lost 300 hours productive.
The most obvious machine time which is being lost is the one hour per day at lunchtime. This amounts to 250 lost production hours per year. These additional 250 hours could be used to produce an extra 178 Red panels (250/1.4 hours). Red panels should be made first in preference to Black panels since they generate a higher throughput per machine hour. If workers were trained to use all three machines then, if their lunch times were staggered, it may be possible to keep machine M running for the whole working day. However, even after doing this, there would still be 590 additional hours of time required on Machine M if the full market demand is going to be satisfied. Therefore, more time needs to be made available.
Finally then, in order to increase productive hours on M, the working hours of the factory would need to be increased. Either the working day could be made longer, given that workers must already be working shifts, or maybe the factory could open for one extra day per week.
- Tags: Bottleneck, Just-in-Time, Machine Utilisation, Productivity, Solar Panels, Throughput Accounting
- Level: Level 2
- Topic: Cost Management Strategies
- Series: MAY 2025
- Uploader: Samuel Duah