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Question 2-8: Choosing the Most Economic Material for a Part A good exampl...

Choosing the Most Economic Material for a Part
A good example of this situation is illustrated by a part for which annual demand is 100,000 units. The part is produced on a high-speed turret lathe, using 1112 screw-machine steel costing $0.30 per pound. A study was conducted to determine whether it might be cheaper to use brass screw stock, costing $1.40 per pound. Because the weight of steel required per piece was 0.0353 pounds and that of brass was 0.0384 pounds, the material cost per piece was $0.0106 for steel and $0.0538 for brass. However, when the manufacturing engineering department was consulted, it was found that, although 57.1 defect-free parts per hour were being produced by using steel, the output would be 102.9 defect-free parts per hour if brass were used. Which material should be used for this part?

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The machine attendant is paid $15.00 per hour, and the variable (i.e., traceable) overhead costs for the turret lathe are estimated to be $10.00 per hour. Thus, the total cost comparison for the two materials is as follows:

Bass 1112 Steel
$1.40 × 0.0384 = $0.0538 $0.30 × 0.0353 = $0.0106 Material
$15.00/102.9 = 0.1458 $15.00/57.1 = 0.2627 Labor
$10.00/102.9 = 0.0972 $10.00/57.1 = 0.1751 Variable overhead
$0.2968 $0.4484 Total cost per piece
Saving per piece by use of brass = $0.4484 − $0.2968 = $0.1516

Because 100,000 parts are made each year, revenues are constant across the alternatives. Rule 2 would select brass, and its use will produce a savings of $151.60 per thousand (a total of $15,160 for the year). It is also clear that costs other than the cost of material (such as labor and overhead) were important in the study.

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