Cost of production
Albatross Anchor incurs the cost of production when manufacturing its products that included the bell anchors and snag hook anchors. The cost it incurs to manufacture mushroom or bell anchor is $8.00 per pound while that for snag hook anchors is $11.00 per pound. Their market price per unit is the same as what the competitors charge. Besides, we have two types of costs, and they include the following. The variable cost encompasses the materials and labor needed to manufacture the anchor, and they vary depending on the quantity of the output required (Arnold, 2008). Second, fixed costs are always constant regardless of the number of anchors the owner would like to produce. Albatross experiences operation inefficiencies, which decreases the profit margin by 35%. Therefore, when you compare Albatross Anchors are cost disadvantaged compared to their competitors.
Economies of scale
A company experiences economies of scale when it gains the cost advantage due to the size of the output or its scale of operation while the cost of producing an additional quantity of the production decreases (Arnold, 2008). Similarly, the company will have the chance to lower the cost of production when it grows and increase the production units. The two types of economies of scale include internal economies of scale that a company benefits regardless of the environment or industry it operates and the external economies whereby the company benefits because the industry it operates is organized. Therefore, Albatross Anchors can benefits from economies of scale by purchasing the materials in bulk thus receiving discounts from the suppliers.
Cost of materials sitting idle in the warehouse
The raw materials and finished goods share the same space in the warehouse. Therefore, there is limited space since Albatross produces anchors in small batches. The small amount of space to accommodate the raw materials and finished products means that Albatross would not benefits from their move to allow a lot of raw materials to sit idle in the warehouse.
Cost of finished goods sitting idle in the warehouse
First, Albatross failed to implement the expansion of the manufacturing section for the second product. Second, it failed to make changes to its facilities so that it could house the domestic and international shipments. Because of its failures, there is increased the time for both receiving materials and shipping finished products. It is because the international shipments have to go out of the receiving dock hence wasting more time. Such inefficiencies that include idle raw materials and finished goods increases costs.
The inventory control aims at ensuring that the level of raw materials and finished products are maintained at the lowest cost possible (Wang, 2010). For the case of Albatross, the level of inventory required depends on the cost and space, the speed of production, difficulty in purchasing and the shelf life of goods. On the same note, Albatross has limited space, and this has affected its ability to store more finished goods that would have increased the lead-time. However, Albatross has the advantage because it has only two products and the methods they employed in the manufacturing process are efficient for the two products.
The manufacturing process is restrained to the extent that it cannot support the smooth production of separate product lines. The two types of anchors require separate manufacturing lines and the time to switch from one manufacturing mode to the other is 36 hours. Regarding the manufacturing process, this time is quite long hence putting Albatross to a disadvantaged state. Moreover, if Albatross were in a position to maintain both manufacturing processes and not waste resources and time switching the machines, they would have reduced the production cost and increase the profit margin.
For this case, the manufacturing process uses outdated technology. They are deprived of using advanced technology, and they dwell on traditional methods to make the anchors. The firm was incorporated in 1976, and this means that their current technology was also employed in the same year. Albatross Anchors uses a manual manufacturing process with its 130 employees.
The current floor plan of Albatross Anchors is inefficient to manage and allow the free and smooth flow of operations. Besides, the layout of the facility separates essential components of the manufacturing process from one another. For instance, the space where the finished products and raw materials are stored is located far from the entire facility and particularly, it is towards the south. The workers takes a lot of time when shipping finished good from the location. Therefore, if the firm decides to move the manufacturing section closer to the shipping area, it will save a lot of time to ship the finished products (Shah, 2009).
Also, the foundry is located between the receiving and shipping area. It location impairs the flow of work in the production process. It would be better if the foundry were moved to the manufacturing process since it will allow the firm to concentrate efficiently on the international shipping. Similarly, the action will help solve the issues of having idle finished goods and raw materials. Ultimately, Albatross Anchors are using a mixed manufacturing model, and it would be ideal if they serve it with a focused factory type of layout. The type of layout is convenient for a small number of customers, products, and processes and this would result to a simpler and focused factory that is concerned with not more than two key tasks (Bhattacharya, 2014).
Albatross Anchors is a manufacturing company that believes in providing quality anchors to its clients. Apart from just offering quality products, Albatross offers the wholesalers warranties and spare parts. However, it finds a challenge to compete with the leaders in the market on serving the customers better.
For each process, the following fixed costs and variable costs are identified below.
|Anchor and Process||Process A||Process B|
|Sales price per anchor||$45.00||$45.00|
|Total fixed cost||$650,000.00||$950,000.00|
|Variable cost per anchor||$36.00||$29.99|
Based on the above information identify:
|Anchor and Process||Process A||Process B|
|Fixed cost per anchor||$650,000.00||$950,000.00|
|The total number of anchors to attain break-even point for process A and Process B||72,222.22||62,913.91|
Based on your calculation which process (A or B) that you would recommend for adoption (select only one).
The formula for break-even point is given by Q= Fixed cost /(unit of price-Variable unit cost)
For Process A,
Q= $650,000/ ($45-$36) = 72,222.22
For Process B,
Q= $950,000/ ($45 – $29.99) = 62,913.91
Process A has a higher break-even point than Process B. Therefore, I will recommend Albatross to use Process B because the company will be able to break-even with a lower variable cost. This will enable the company to produce larger batches, experience low cost and increase the profit margin.
In conclusion, Albatross need to implement a technologically advanced production process. The technology should support the mixed model manufacturing. Also, the company should design the layout of its facilities to support the focused factory and this will ensure that the firm reduces its costs, increase efficiency and profit margin (Bhattacharya, 2014). In a nutshell, Albatross Anchors has the potential to grow beyond its current status if it implements the above strategies.
Arnold, R. A. (2008). Economics. Mason, OH, USA: Thomson South-Western.
Bhattacharya, S. (2014). Operations management. Place of publication not identified: Prentice-Hall Of India.
Shah, J. (2009). Supply chain management: Text and cases. Upper Saddle River, N.J: Pearson Education.
Wang, J. X. (2010). Lean manufacturing: Business bottom-line based. CRC Press.
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