Chapter 4

CHAPTER 4
PRODUCT DESIGN PROCESS

Problems

Problem Type of Problem Difficulty New Modified Check

NPV House of Assembly Flow Problem Problem Figure in
Problem Quality Chart Process Appendix A
Chart
1 Yes Moderate Yes
2 Yes Moderate Yes
3 Easy
4 Yes Moderate
5 Yes Yes Difficult

1. Tuff Wheels Kiddy Dozer

a. Base case

Project Schedule Year 1 Year 2 Year 3 Year 4

Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Development 333 333 333
Pilot Testing 100 100
Ramp-up 200 200
Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38
Production Volume 15 15 15 15 15 15 15 15 15 15 15 15
Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100
Production Costs         1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Sales Volume 15 15 15 15 15 15 15 15 15 15 15 15
Unit Price 170 170 170 170 170 170 170 170 170 170 170 170
Sales Revenue         2550 2550 2550 2550 2550 2550 2550 2550 2550 2550 2550 2550

Period Cash Flow -333 -333 -633 -338 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013
PV Year 1 r = 8 -333 -327 -609 -318 935 917 899 881 864 847 831 814 798 783 767 752

Project NPV 8503

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 Product Design Process

b. The results are shown below for both scenarios. If sales are only 50,000 then the project is still
worthwhile since the NPV decrease to Rs6,759,000. If Tuff Wheels has under estimated the sales and it
ends up being 70,000 per year then NPV will increase from Rs8,503,000 base case to Rs10,247,000 with
the higher sales rate.

Sales Revised to 50,000 per Year

Project Schedule Year 1 Year 2 Year 3 Year 4
Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Development 333 333 333
Pilot Testing 100 100
Ramp-up 200 200
Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38
Production Volume 13 13 13 13 13 13 13 13 13 13 13 13
Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100
Production Costs         1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250
Sales Volume 13 13 13 13 13 13 13 13 13 13 13 13
Unit Price 170 170 170 170 170 170 170 170 170 170 170 170
Sales Revenue         2125 2125 2125 2125 2125 2125 2125 2125 2125 2125 2125 2125

Period Cash Flow -333 -333 -633 -338 838 838 838 838 838 838 838 838 838 838 838 838
PV Year 1 r = 8 -333 -327 -609 -318 774 759 744 729 715 701 687 674 660 647 635 622

Project NPV 6759

Sales Revised to 70,000 per Year

Project Schedule Year 1 Year 2 Year 3 Year 4
Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Development 333 333 333
Pilot Testing 100 100
Ramp-up 200 200
Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38
Production Volume 18 18 18 18 18 18 18 18 18 18 18 18
Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100
Production Costs         1750 1750 1750 1750 1750 1750 1750 1750 1750 1750 1750 1750
Sales Volume 18 18 18 18 18 18 18 18 18 18 18 18
Unit Price 170 170 170 170 170 170 170 170 170 170 170 170
Sales Revenue         2975 2975 2975 2975 2975 2975 2975 2975 2975 2975 2975 2975

Period Cash Flow -333 -333 -633 -338 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188
PV Year 1 r = 8 -333 -327 -609 -318 1097 1076 1054 1034 1014 994 974 955 936 918 900 882

Project NPV 10247

c. The impact of changing the interest rate is shown below. There is still a positive NPV but it shrinks the
interest rate increases. This would be expected since a higher the interest rate reduces the present value of
future cash flows.

Base Case 8% Rs8,503,043

9% Rs8,283,241
10% Rs,8069,666
11% Rs7,862,116

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 Chapter 4

2. Perot Corporation Patay2 Chip.

a. In the base case the Patay2 Chip Project has a very good NPV of Rs10,460,000, see below.

Project Schedule Year 1 Year 2 Year 3 Year 4

Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half
Development Cost 5,000 5,000 5,000 5,000
Pilot Testing Cost 2,500 2,500
Debug Cost 1,500 1,500
Ramp-up Cost 3,000
Advance Marketing Cost 5,000
Ongoing Marketing and Support 500 500 500 500
Production Volume 125 125 75 75
Unit Production Cost 655 655 545 545
Production Costs         81,875 81,875 40,875 40,875
Sales Volume 125 125 75 75
Unit Price 820 820 650 650
Sales Revenue         102,500 102,500 48,750 48,750

Period Cash Flow -5,000 -5,000 -9,000 -17,000 20,125 20,125 7,375 7,375
PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 16,557 15,768 5,503 5,241

Project NPV 10,460

b. Additional 10 million for higher price is clearly worthwhile as it raises the NPV from Rs10.46 million to
Rs16.654 million. See results below.

Project Schedule Year 1 Year 2 Year 3 Year 4

Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half
Development Cost 7,500 7,500 7,500 7,500
Pilot Testing Cost 2,500 2,500
Debug Cost 1,500 1,500
Ramp-up Cost 3,000
Advance Marketing Cost 5,000
Ongoing Marketing and Support 500 500 500 500
Production Volume 125 125 75 75
Unit Production Cost 655 655 545 545
Production Costs         81,875 81,875 40,875 40,875
Sales Volume 125 125 75 75
Unit Price 870 870 700 700
Sales Revenue         108,750 108,750 52,500 52,500

Period Cash Flow -7,500 -7,500 -11,500 -19,500 26,375 26,375 11,125 11,125
PV Year 1 r = 12 -7,500 -7,143 -10,431 -16,845 21,699 20,666 8,302 7,906

Project NPV 16,654

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 Product Design Process

c. Reduced sales estimates have a significant impact on the NPV. It reduces the NPV all the way down to
Rs10,000. The success of the Patay2 Chip is very dependent on the sales estimates. It would be wise for
Perot to make sure that there is sufficient demand for Patay2 Chips.

Project Schedule Year 1 Year 2 Year 3 Year 4

Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half
Development Cost 5,000 5,000 5,000 5,000
Pilot Testing Cost 2,500 2,500
Debug Cost 1,500 1,500
Ramp-up Cost 3,000
Advance Marketing Cost 5,000
Ongoing Marketing and Support 500 500 500 500
Production Volume 100 100 50 50
Unit Production Cost 655 655 545 545
Production Costs         65,500 65,500 27,250 27,250
Sales Volume 100 100 50 50
Unit Price 820 820 650 650
Sales Revenue         82,000 82,000 32,500 32,500

Period Cash Flow -5,000 -5,000 -9,000 -17,000 16,000 16,000 4,750 4,750
PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 13,163 12,536 3,545 3,376

Project NPV 10

3. Answers will vary based upon the product selected and the student. Issues that should be considered in
the design and manufacture of a product include design process (traditional vs. concurrent
engineering), customer needs and expectations, legal considerations (EPA, OSHA, etc.), service life,
reliability, appearance, standardization, any industry standards that should be considered (e.g.,
television set and the type of signal received from stations), method of shipment, material cost and
availability, stage of the product life cycle, design for manufacturability, design for assembly,
packaging, environmental, unit cost, pricing, availability of purchased material, availability of
capacity, availability of subcontractors, setup cost, manufacturing time, volume, and expected product
life.

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Chapter 4

4. Answers may vary.

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 Product Design Process

5. This can be a fairly extensive assignment depending upon the amount of research students do into
paddle manufacturing. Without doing any library or field study on the production process, students
should be able to come up with a solution approximating the one given below.

a. obtain paddle for model

b. equipment and materials
equipment: bandsaw, hand saws, circular saw, sanding machine, lathe, glue press, handtruck
materials: wood, plywood, rubber for paddle surface, glue, lacquer, plastic bags for wrapping,
shipping boxes, and tape.

(1) Assembly drawing

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Chapter 4

(2) Assembly chart

46
 Product Design Process

(3) Flow Process Chart

Receive plywood Receive wood

Receive rubber for main piece for handle

Inspect Inspect Inspect

To Circular
To saw To hand saws
Saws

Cut from
Cut to size Cut handle
plywood

Wait for Cut into

To glue
main piece two pieces

To glue

Wait for
main piece

Glue

Inspect

Lacquer

Dry

Glue rubber
surfaces

Inspect

To packing

Put in
plastic bags

Box for
shipment

To finished
goods

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Chapter 4

(4) Process route sheets

Part Name: Main Piece

Operation Operation description Dept. Setup Pieces per Tools
number time hour
10 Cut to size Saw 1.0 100 Band saw
20 Glue handle facing Glue 0.5 50 Clamps
21 Lacquer Glue 0.3 100 Paint brush
22 Glue rubber surface Glue 0.1 100 Paint brush

Part Name: Handle Facing

Operation Operation description Dept. Setup Pieces per Tools
number time hour
15 Cut to size Saw 0.25 400 Circular saw
16 Cross cut diameter Saw 0.25 100 Circular saw
20 Glue handle facing Glue 0.5 50 Clamps

Part Name: Rubber Surface

Operation Operation description Dept. Setup Pieces per Tools
number time hour
16 Cut to size in batches of 24 Saw 0.3 300 Band saw
22 Glue rubber surface Glue 0.1 100 Paint brush

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 Product Design Process

5. a. Process Flow Diagram.

Capacity of assembly line 1 = 140 units/hour X 8 hours/day X 5 days/week = 5,600 units/week.

Capacity of drill machines = 3 drill machines X 50 parts/hour X 8 hours/day X 5 days/week =

6,000 units/week.

Capacity of final assembly line = 160 units/hour X 8 hours/day X 5 days/week = 6,400 units/week.

The capacity of the entire process is 5,600 units per week, with assembly line 1 limiting the
overall capacity.

b. Capacity of assembly line 1 = 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines = 4 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week =

8,000 units/week.

Capacity of final assembly line = 160 units/hour X 16 hours/day X 5 days/week = 12,800

units/week.

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Chapter 4

The capacity of the entire process is 8,000 units per week, with drilling machines limiting the
overall capacity.

c. Capacity of assembly line 1 = 140 units/hour X 16 hours/day X 5 days/week = 11,200 units/week.

Capacity of drill machines = 5 drilling machines X 50 parts/hour X 8 hours/day X 5 days/week =

10,000 units/week.

Capacity of final assembly line = 160 units/hour X 12 hours/day X 5 days/week = 9,600

units/week.

The capacity of the entire process is 9,600 units per week, with final assembly machines limiting t
he overall capacity.

d. Cost per unit when output = 8,000 units.

Item Calculation Cost

Rs3,20
Cost of part A Rs.40 X 8,000
0
Cost of part B Rs.35 X 8,000 2,800
Cost of part C Rs.15 X 8,000 1,200
Electricity Rs.01 X 8,000 80
Assembly 1 labor Rs.30 X 8,000 2,400
Final assembly labor Rs.30 X 8,000 2,400
Drilling labor Rs.15 X 8,000 1,200
Rs1,200 per
Overhead 1,200
week
Depreciation Rs30 per week 30
Rs14,5
Total
10

Cost per unit = Total cost per week/Number of units produced per week

= Rs14,510/8,000

= Rs1.81

. Cost per unit when output = 9,600 units.

Item Calculation Cost

Rs3,84
Cost of part A Rs.40 X 9,600
0
Cost of part B Rs.35 X 9,600 3,360
Cost of part C Rs.15 X 9,600 1,440
Electricity Rs.01 X 9,600 96
Assembly 1 labor Rs.30 X 9,600 2,880
Final assembly labor Rs.30 X 9,600 2,880
Drilling labor Rs.15 X 9,600 1,440
Rs1,200 per
Overhead 1,200
week
Depreciation Rs30 per week 30
Rs17,1
Total
66

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 Product Design Process

Cost per unit = Total cost per week/Number of units produced per week

= Rs17,166/9,600

= Rs1.79

Let X = the number of units that each option will produce. When the company buys the units, the
cost is Rs3.00 per unit (3X). When it manufactures the units, they incur a fixed cost of Rs120,000
(4 drilling machines at Rs30,000 a piece) and a per unit cost of Rs1.81. Therefore, 120,000 +
1.81X is the cost of this option. Set them equal to each other and solve for X to determine the
breakeven point.

3X = 120,000 + 1.81X

X = 100,840 units.

Therefore, it is better to buy the units when you produce less than 100,840, and better to produce
them when demand is greater than 100,840 units.

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