Problem 16.3 : COST EVALUATION

The type of tooling to make for a manufacturing process depends on the expected total quantity of parts. Tooling made from standard components and less wear-resistant materials (soft tooling) can be made more quickly and cheaply than conventional tooling made from hardened steel (hard tooling). Use the concept of break-even point to determine the production quantity for which soft tooling can be justified. The following cost data applies:

Soft tooling                             Hard tooling

Tooling cost                                                    C_S $600                                   C_H $7500

Setup cost                                                       S_S $100                                   S_H $60

Unit part cost                                                  C_PS $3.40                                C_PH $0.80

The total production run is expected to be 5000 units. Parts are made in batches of 500.

Answer:

The break-even point is the sales or production volume at which sales and costs balance.

C_H + {Q_BEP/b} S_H + C_PH Q_BEP = C_S + {Q_BEP/b} + S_S+ C_PS Q_BEP

Break-even point, Q_BEP = C_H - C_S / ({S_S - S_H}/b} + {C_{PS -} C_PH})

= 7500 – 600/ ({100 - 60}/500} + {3.4 – 0.8})

= 2574.63

= 2575 units

The break-even point gives the total production at which the hard tooling approach becomes more cost effective than soft tooling. Since the total production is 5000 units, the best decision is to use hard tooling if the time required to make to tools and prepare the production machines is compatible with the product development schedule.

The units for the basic equation above are: