Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the first quarter of operations during the current year the following data were reported:

Management of Mittel Rhein AG of Köln, Germany, would like to reduce the amount of time between when a customer places an order and when the order is shipped. For the first quarter of operations during the current year the following data were reported:

Inspection time	0.5	days
Wait time (from order to start of production)	16.4	days
Process time	2.7	days
Move time	1.3	days
Queue time	3.9	days

Required:

1. Compute the throughput time. (Round your answer to 1 decimal place.)

2. Compute the manufacturing cycle efficiency (MCE) for the quarter. (Round your percentage answer to nearest whole percent.)

3. What percentage of the throughput time was spent in non–value-added activities? (Round your percentage answer to nearest whole percent.)

4. Compute the delivery cycle time. (Round your intermediate calculations and final answer to 1 decimal place.)

5. If by using Lean Production all queue time during production is eliminated, what will be the new MCE? (Do not round intermediate calculations. Round your percentage answer to nearest whole percent.)

Answer

1.

Throughput time	= Process time + Inspection time + Move time + Queue time
	= 2.7 days + 0.5 days + 1.3 days + 3.9 days
	= 8.4 days

2.

Only process time is value-added time; therefore the manufacturing cycle efficiency (MCE) is:

MCE =	Value-added time	=	2.7 days	= 0.32
	Throughput time		8.4 days

3.

If the MCE is 32%, then 32% of the throughput time was spent in value-added activities. Consequently, the other 68% of the throughput time was spent in non-value-added activities.

4.

Delivery cycle time	= Wait time + Throughput time
	= 16.4 days + 8.4 days
	= 24.8 days

5.

If all queue time is eliminated, then the throughput time drops to only 4.5 days (0.5 + 2.7 + 1.3). The MCE becomes:

MCE =	Value-added time	=	2.7 days	= 0.600
	Throughput time		4.5 days

Thus, the MCE increases to 60.0%. This exercise shows quite dramatically how lean production can improve the efficiency of operations and reduce throughput time.

thank you!

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

	Division A			Division B			Division C
Sales	$	16,000,000		$	36,000,000		$	20,800,000
Average operating assets	$	3,200,000		$	7,200,000		$	5,200,000
Net operating income	$	752,000		$	576,000		$	540,800
Minimum required rate of return		9.00	%		9.50	%		10.40	%

Required:

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

2. Compute the residual income (loss) for each division.

3. Assume that each division is presented with an investment opportunity that would yield a 10% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Solution

1.

ROI computations:

ROI =	Net operating income	×	Sales
	Sales		Average operating assets

Division A:

ROI =	$752,000	×	$16,000,000	= 4.70% × 5.00 = 23.50%
	$16,000,000		$3,200,000

Division B:

ROI =	$576,000	×	$36,000,000	= 1.60% × 5.00 = 8.00%
	$36,000,000		$7,200,000

Division C:

ROI =	$540,800	×	$20,800,000	= 2.60% × 4.00 = 10.40%
	$20,800,000		$5,200,000

2.

	Division A			Division B			Division C
Average operating assets	$	3,200,000		$	7,200,000		$	5,200,000
Required rate of return	×	9.00	%	×	9.50	%	×	10.40	%
Minimum required return	$	288,000		$	684,000		$	540,800
Actual operating income	$	752,000		$	576,000		$	540,800
Minimum required return (above)		288,000			684,000			540,800
Residual income	$	464,000		$	(108,000	)	$	0

3.

a. & b.

	Division A	Division B	Division C
Return on investment (ROI)	23.50%	8.00%	10.40%
Therefore, if the division is presented with an investment opportunity yielding 10%, it probably would	Reject	Accept	Reject
Minimum required return for computing residual income	9.00%	9.50%	10.40%
Therefore, if the division is presented with an investment opportunity yielding 10%, it probably would	Accept	Accept	Reject

If performance is being measured by ROI, both Division A and Division C probably would reject the 10% investment opportunity. These divisions’ ROIs currently exceed 10%; accepting a new investment with a 10% rate of return would reduce their overall ROIs. Division B probably would accept the 10% investment opportunity because accepting it would increase the division’s overall rate of return.

If performance is measured by residual income, both Division A and Division B probably would accept the 10% investment opportunity. The 10% rate of return promised by the new investment is greater than their required rates of return of 9% and 10%, respectively, and would therefore add to the total amount of their residual income. Division C would reject the opportunity because the 10% return on the new investment is less than its 10% required rate of return.
Thank you!