Case Study No. 10 Gordon Engineering Company

CASE STUDY NO. 10 GORDON ENGINEERING ENGINEER ING COMPANY 

3rd Term 2014

Answer to Cse !"est#ons 1. What What are the factors factors should should be consider considered ed in deter determin mining ing whether whether to make or buy?

With regard to this decision to make or buy a certain machine or  product many factors should be consider before making a decision. The following are the factors: Role of Fixed Costs. Fixed costs are sunk costs. What is sunk cannot be retrieved in the same condition. Fixed costs cannot be reversed without loss. !achinery purchased already cannot be sold without loss in terms of  money. Fixed costs that are incurred are not relevant for our decision"making. Costs that will be incurred in any event should not be considered in the decision"making. #n other words the existing fixed costs which cannot be saved do not influence the decision as those costs are already incurred and cannot be reversed whether the firms makes or buys. Compar Compare e the saved saved costs costs with with the corres correspo pondi nding ng market market price price for  decision"m decision"makin aking g to buy or continue to produce. produce. Costs that can be saved are only $ariable $ariable Costs. %o compare variable costs with market price for decision making when the machinery turns to be idle. This decision will be always a comparison between two options and choose the best option for the company to stay profitable. 2. Should Should the company company continu continue e to have the legs legs painted, painted, assembl assembled ed and packaged outside or should this operation be done in Gordon plant?

The The &ord &ordon on engi engine neer erin ing g comp company any shou should ld cont contin inue ue with with Fowl Fowler  er  Company in painting assembling and packaged the materials even though there are little difficulties on 'uality. #n connection with this they should make a contract that contains their specifications and rules on 'uality assurance for  them to have their desired output. . !f the compan company y is e"peri e"perienc encing ing unsatis unsatisfac factor tory y #uali #uality ty in the paintin painting, g, assembly and packaging work, what action would you recommend be taken to control it?

(ased on the difficulties that they were experiencing i would like to recommend having an in"house supplier that they can easily consult with 'uality that they are providing from day to day basis. This will help them save travel cost and as well as inventory. $. Why do you you think the produc production tion manager manager oppos opposed ed the purcha purchase se of the grinder?

The production manager is opposing the proposal to buy the grinder  because it was not yet proven to him the return of investment that the machine will have. #n addition this should be clearly clearl y discussed to him because this will be the measure if he will say yes to the grinder.

PRODUCTION AND OPERATIONS MANAGEMENT  $ EMG213

COM

3rd Term 2014

CASE STUDY NO. 10 GORDON ENGINEERING COMPANY 

%. What action would you recommend regarding the grinder? Price of the grinder $ 18,000.00

Trade-in Equipment $ 6,600.00

New Price of the grinder $ 11,400.00

#n view of the above table we can see the price of the grinder is much lower because of the trade in e'uipment. (ased on this # will not recommend this new grinder because it is an additional cost together with this there is also a freight cost of )*.++ per table each way. &. 'hese are typical make or buy decisions. (repare a make or buy policy statement, a standard procedure and an analysis from to guide the company in such decisions. !"pecia# Too# in grinding (i)ed co*t +irect aor hee# ear oo#ant* and 2i*ce##aneou* o*t 3erhead !1/05 of the direct #aor  Tran*portation o*t Equipment o*t Price of the grinder  Trade-in Equipment New Price of the grinder

%!%u&ing the 'rinder 1.08

./  0.6

1.6

.7/

0.1

0.1

1400

18000 -6600 11400

140.8

808./

(ased on the table above we can see that adding a special grinding will be sufficient to suffice their re'uirements.

PRODUCTION AND OPERATIONS MANAGEMENT  $ EMG213

COM