A company that manufactures paving material for driveways and parking lots expects the following demand for its product for the next four weeks: Week number 1 2 3 4
Material(tons) 40 80 60 70
Production standard
(hours per ton) 4 3
Material production
capacity(hours) 300 200
A. Determine the capacity utilization for labor and machine for each of the four weeks.
B. In which weeks do you foresee a problem? What options would you suggest to resolve any problems? What costs are relevant in making a decision on choosing an option?

A. Capacity Utilization for Labor and Machine

                    Labor          Capacity  %              Machine     Capacity  %

Week 1        160 (40*4)    53.3% (160/300)       120 (40*3)   60% (120/200)

Week 2       320 (80*4)  106.7% (320/300)     240 (80*3)  120% (240/200)

Week 3       240 (60*4)    80% (240/300)        180 (60*3)   90% (180/200)

Week 4       280 (70*4)    93.3% (280/300)     210 (70*3)  105% (210/200)

B. There is a problem in weeks 2 and week 4.  In week 2, both the labor and machine capacities were over-utilized, while in week 4 only the machine capacity was over-utilized.  In other weeks, there were notable under-utilization of labor and machine capacities.

B2. Production materials for the weeks should have been made even (60 tons per month) to smoothen the demand on weeks 2 and 4.

B3. The relevant costs involved in making this decision are direct labor costs.

Explanation:

a) Data and Calculations:

Week number          1       2      3      4

Material(tons)          40    80    60   70

The company’s labor and machine standards and available capacities are as follows:

                                                                Labor   Machine

Production standard  (hours per ton)         4            3

Material production  capacity(hours)     300       200

A. Capacity Utilization for Labor and Machine

                    Labor          Capacity  %              Machine     Capacity  %

Week 1        160 (40*4)    53.3% (160/300)       120 (40*3)   60% (120/200)

Week 2       320 (80*4)  106.7% (320/300)     240 (80*3)  120% (240/200)

Week 3       240 (60*4)    80% (240/300)        180 (60*3)   90% (180/200)

Week 4       280 (70*4)    93.3% (280/300)     210 (70*3)  105% (210/200)

Total labor hours = material * production standard hour per ton.

Total machine hours = material * production standard hour per ton.

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