Reducing Waste vs. Increasing Sales Revenue
In a competitive marketing environment for consumer products, manufacturers are not allowed the luxury of raising selling prices to increase profits. This environment makes it difficult to increase sales unit volume without increasing very costly marketing expenses. Without price increases and sales volume increases it is the job of top management decision makers (you) to find other ways to increase profitability – they turn to Continuous Improvement.
Background:
We manufacture and distribute W&Ws, candy coated chocolate spheroids, in assorted colors. The production schedule = 1200 cases per 8 hours. Breaking down our standard cost of sales for our product, W&Ws, packaged in 3.75 ounce bags, 24 bags to a box, we find:
Labor:
88 hourly workers; $14.77 per hour, 8 hours per day, 5 days per week, 50 weeks per year, no overtime.
24 salaried managers @ $39,600 per year
Ingredients:
Chocolate; 2.0 ounces per bag, @ $9.99 per pound
Hard candy coating; 1.75 ounces per bag @ $6.55 per pound
Caffeine; 1 grams per bag; priced @ $300 per kilogram.
Packaging: One 3.75 ounce bag @ $.005, and one shipping case (each case contains 24 bags) @ $.120.
Overhead per 8 hour shift: $5600
DKI Apr 2015
Variances: Yesterday’s Production Variance Reports show we overused hourly labor by 3.8%; candy bags by 4.9%; chocolate by 4.9% and candy coating by 4.9%. Caffeine’s reported usage was unfavorable by 11%. Actual production was 1200 cases of W&Ws.
Margin: We currently price to yield a 25% gross margin (selling price - standard cost/selling price).
Your assignments:
Calculate the standard cost for one (1) 3.75 ounce bag of W&Ws (100% yield, no waste).
Calculate the standard cost for 1200 cases (one day’s production).
Calculate the gross sales dollar value for one (1) day’s production (1200 cases) and the gross margin dollars from those sales (standards).
What is the total dollar value for all variances listed above for yesterday?
If we can reduce the material variances by 20%, assuming these variances occur every days of operation, how much waste will we save in one (1) year?
How many dollars of sales are needed to yield the same gross margin $ amount as the 20% variance reductions?