Posted: April 8th, 2015

# Operation management

Operation management

Order Description

DC Delco Corporation

DC Delco Corporation manufactures and sells the various electrical parts. One of the best- selling products is an electric motor. The company recently received a \$750,000 order for various quantities of three types of electric motors: Model A, B, and C. More specifically, the firm received the following number of orders for each of the three electric motors.

Model A Model B Model C
Number Ordered 3,000 2,000 900

Each electric motor requires a certain amount of time to wire and harness. Model A requires 2 hours of wiring and 1 hour of harnessing per unit; Model B needs 1.5 hours of wiring and 2 hours for harnessing per unit; and Model C requires 3 hours of wiring and 1 hour of harnessing per unit. Unfortunately, DC Delco does not have enough wiring and harnessing capacity to satisfy the order by its due date. The firm currently has only 10,000 hours of wiring capacity and
5,000 hours of harnessing capacity available to devote to this order. However, the company can subcontract any portion of this order to one of its suppliers. The unit costs of producing each
model in-house and buying the finished products from the vendor are summarized below.

Model A Model B Model C
Cost to Make \$50 \$83 \$130
Cost to Buy \$61 \$97 \$145

You have been hired by the CEO of DC Delco, James Strong, to determine the number of electric motors to make and the number to buy to fill the customer order at the least possible cost.

**Directions**: This case analysis can be done either individually or by a team with a maximum of three students. Prepare a three -page (maximum) business memo to James Strong, outlining your analysis, explanation, and conclusion. Submit your business memo on April 17, 2015 (Friday), 11 am. (No Exception). On the main body of your business memo, identify and explain your decision variables to solve the problem. Using the decision variables, you are required to write down the mathematical equations representing this problem and to use Excel Solver to solve the problem.**(Include and explain all of the mathematical equations on the main body, and also attach Excel Solver results at the end of your business memo as your supporting materials. Make sure to include your team members’ names and their roster numbers on the
memo, too.)**

Use the memo writing guidelines (sample business memo) from the course website as your reference. Do not simply follow the guideline. Your business memo should be clear, in detail, professional, and self-explanatory. Along with your thorough analysis, a good organization and

flow of paragraphs and sentences, clarity and correctness, and your writing are important in the evaluation.

If the case analysis is done by a team, a team evaluation will be conducted after submitting the memo to reflect your contribution to the analysis.

(1) Do you have a maximum of three pages, including all of your supporting materials?
(2) Did you identify and explain your decision variables on the main body of your memo? (3) Did you include and explain all of the mathematical equations on the main body?
(4) Did you attach Excel Solver results, showing your total cost, at the end of your memo? (5) Did you complete a final editing before submitting your memo?
(6) Did you include your names and roster numbers?
=================================================================================

(The business memo format is best suited for presenting analysis and results of an issue that requires no more than 2 -3 pages of text and a couple of tables and exhibits. Anything longer should use a business report format with a very short transmittal memo ).

Martha Glamour, CEO Stylish Living Magazine

FROM: Simpson and Lee Consulting Associates (This tells the reader your role as writer – e.g. consultant, analyst to reporting to manager, etc.)
Thomas Simpson (Principal Writer) Richard Lee (Principal Editor). (The w ords principal writer and editor do not appear in a real business memo; they are here for grading purposes only. In the real world you would substitute the titles of the authors, e.g. Partner or Senior Manager).
RE: Analysis of existing cost system and desirability of switching to ABC.

Thank you for allowing us the opportunity to work with your company (simple courtesy and positive start). As requested, we have evaluated the strengths and weaknesses of your company’s existing cost system and evaluated the desirability of switching from the existing cost system to an activity based cost system ABC). (This sentence should clearly state the “big” issue in the case. It should also help to remind the intended audience of the purpose of this memo). Our analysis uses Products X and Y as test cases to understand how the existing and proposed ABC systems would compute product costs. Based on our study, we have reached the following conclusions:

1. The cost of Product X is higher than Product Y under the current system; the cost Product X is lower than Product Y under the ABC system.
2. The existing cost system has several weaknesses that make the data unreliable and misleading.
3. We recommend that the company should abandon the existing system and replace it with an activity based cost system as it will provide better product cost information for decision making.

(The three points above are what the writing guide refers to as “headlines”. They state the major conclusions of your memo and should (like a newspaper headline) grab the reader’s attention. Note a headline does not contain detailed results such as cost of Product X is \$3.45 per unit.).

The rest of this memo explains the basis of our conclusions. We will present our analysis in four parts. The first part deals with product cost under the existing system. This is followed by . . . The next section
. . . The last section . . .

(The purpose of these sentences is to give the reader a road map to follow your discussion. Note that the four parts probably correspond to the detailed questions at the back of the case. These questions typically lead you to address the big issue in the case. If the memo is longer than 2 pages, you may have to use subheadings to avoid long bodies of texts).

Product Cost Analysis

Our analysis begins by computing the costs of the two products, X and Y, using the current cost system. Exhibit 1 shows the manufacturing cost of the two products under the existing cost system. As row 5 shows, product X has a cost of \$25.45 per unit. (Note the reader is being pointed to the data and not left to find it for him or herself). Also, as column 3 of the Exhibit shows, most of this cost, approximately 65
percent, is indirect manufacturing overhead. The last row of the Exhibit shows that . . . (Rest of the d etails omitted intentionally).

Exhibit 1
Costs of Manufacturing Product X and Product Y

Insert table here
(Note that EXCEL tables and PowerPoint flowcharts can be pasted directly into your document. Make sure that EXCEL tables fit the width of your page and PowerPoint flowcharts should be pasted as pictures(use the Paste Special command).

Weakness of Existing Cost System

The current system of assigning overhead to products using direct labor hours does not represent a fair measure of resources used by the products. Your company produces a large variety of products in low volume with highly automated operations. Direct labor accounts for only 3% of the total cost of manufacturing (See Exhibit 1). In your production environment, most of the indirect manufacturing costs are driven by cost drivers that have little or no relationship to the amount of direct content of each
product. The relevant cost drivers in your situation are . . . (Rest of the d etails omitted intentionally).

Conclusion and Recommendations (Not you are reiterating what you said up front one mo re time). .

We recommend that the company abandon its current cost system and replace it with . . . (Rest of the details omitted intentionally). This will allow you to better measure the resources consumed by each product and lead to better pricing and product mix decisions . . . (Rest of the d etails omitted intentionally).
no references needed.

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