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Ajax Corporation has entered into a contract to build a new tooling machine




1. Ajax Corporation has entered into a contract to build a new tooling machine for Beta Machinery, Inc.;The project started several months back, and the most recent (June) Monthly Cost Summary is shown;below. Some of the table entries are missing, but the following additional information has been provided;through other channels;o You can assume that the 100% overhead rate is fixed over the period of performance;o The snapshot in the report below has been taken as of month-end, June 30;o The 80/20 sharing ratio indicates that the customer (Beta) will pay 80% of any costs above;the target and up to the ceiling cost. Likewise, 80% of any cost savings below the target will;go back to Beta.;o The new PV has been revised from the original released PV and now serves as the current;plan of record.;o The ceiling price is based on cost (i.e., before adding in profit);Based on the New Revised PV, how much profit can Ajax expect to make on this project?;a. 120,000;b. 324,000;c. 420,000;d. 300,000;2. (** refers to previous question **) Looking only at direct costs, comparing current month data to;cumulative data shows that;a. The CV is getting worse: 10.3% cumulative to 13.8% current-month;b. The CV is getting better: +$10,800 cumulative to +$53,100 current-month;c. The SV is getting worse: +$6,300 cumulative to $23,300 current-month;d. The SV is getting better: 5.28% cumulative to 8.54% current-month;3. (** refers to previous question **) How much profit/loss would Ajax experience if the final burdened;cost for the program turned out to be $3,150,000?;a. $50,000 loss;b. $170,000 profit;c. $150,000 loss;d. $50,000 profit;Page 1 of 3;Monthly Cost Summary;C ontract: Beta Machinery;Reporting Period: June 1 - June 30;Contract Period: Feb. 1 - Oct. 31;Target Price: $2,800,000;(negotiated target value of contract);Negotiated Cost: $2,500,000;(budgeted target value for all work authorized;under contract);Activity;Pgm Mgt;System A;System B;System C;Mfg Support;Quality Cntl;Total Direct;OH 100%;Total;PV;19,300;23,000;14,000;0;11,600;5,900;73,800;73,800;147,600;Current Month;EV;AC;19,300;19,300;16,600;24,200;15,200;16,800;0;0;10,400;12,000;6,000;6,000;67,500;78,300;67,500;78,300;135,000 156,600;$;SV;CV;0;(6,400);1,200;0;(1,200);100;0;(7,600);(1,600);0;(1,600);0;PV;108,000;158,000;96,000;0;73,000;5,900;Target Fee;12%;Sharing Ratio: 80/20;Ceiling: $3,000,000 (on cost), $3,200,000 (on price);Contract Type: FPIF;Contracted;Cumulative to Date, $;EV;AC;SV;CV;PV;108,000 108,000;0;0;200,000;181,700 234,700 23,700 (53,000);250,000;94,200;93,000 (1,800);1,200;200,000;0;0;0;0;300,000;74,300;75,600;1,300;(1,300);200,000;6,000;6,000;100;0;100,000;1,250,000;1,250,000;2,500,000;Page 2 of 3;At Completion, $;Original;New;Released;Revised;PV;PV;200,000;200,000;200,000;225,000;200,000;200,000;275,000;275,000;190,000;190,000;100,000;100,000;1,165,000;1,190,000;1,165,000;1,190,000;2,330,000;2,380,000;Var.;0;(25,000);0;0;0;0;4. Your company, Veloxy Engineering, has received a one-time contract to design and build 10,000 units of;a new product. During the proposal process, management felt that the new product could be designed and;manufactured at a low cost. One of the ingredients necessary to build the product was a small component;that could be purchased for $60/unit in the open market, including a bulk-purchase quantity discount.;Accordingly, management budgeted $650,000 for the purchasing and handling of 10,000 components;plus scrap.;During the project design stage, your engineering team informs you that the final design will require a;higher-grade component that sells for $72/unit (with quantity discount). The new price is substantially;higher that you had budgeted for, which will create a cost overrun.;You meet with your manufacturing team to see if they can manufacture the component at a cheaper cost;than purchasing it from outside. Your manufacturing team informs you that they can produce a maximum;of 10,000 units, just enough to fulfill the contract. The setup cost would be $100,000 and the raw;material unit cost would be $40/unit. All defective parts must be removed and repaired at a cost of;$120/unit. Since Veloxy has never manufactured this product before, manufacturing expects the;following defect rates and probabilities;Percent Defective;Probability of Occurrence;0%;0.1;10%;0.2;20%;0.3;30%;0.25;40%;0.15;Each of the following would represent a valid reason for Veloxy senior management to decide to make rather;than buy the components except;a. They believe that the engineering estimates of the defect rates are overly pessimistic;b. This is a one-time decision, and expected value analysis makes more sense for decisions that are;likely to occur many times over again in the future;c. They would prefer to enhance the technical competencies of their own firm rather than another;firm;d. The expected cost of the decision to make the components is lower than the expected cost of the;decision to buy;5. (** refers to previous question **) Your manufacturing team informs you that they have found a way to;increase the size of the manufacturing run from 10,000 to 18,000 units in increments of 2,000 units.;However, if any run greater than the original 10,000 is chosen, the setup cost would now be $120,000;(i.e., for a run of 12K, 14K, 16K or 18K). On the other hand, we still only need to deliver 10,000 units, so;the additional units would remove the need to repair some of the defective items, perhaps leading to some;saving of repair costs. The raw material cost would remain at $40/unit.;Based solely on economic considerations, Veloxy should;a. Make 12,000 units;b. Buy 10,000 units;c. Buy 12,000 units;d. Make 10,000 units;6. (** refers to previous question **) Which of the following is true with regard to the Veloxy decision?;a. The higher the setup cost, the greater the likelihood of more defects;b. The higher the probability of more defects, the more attractive the make option becomes;c. The higher the setup cost, the more attractive the buy option becomes;d. The lower the raw material cost, the more attractive the buy option becomes;End of Homework 5


Paper#32900 | Written in 18-Jul-2015

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