4.3 Production
For manufacturers, production literally puts
everything together. The department
coordinates and plans manufacturing runs,
making sure that products get out
the door.
In your Production Department,
each product has its own assembly
line. You cannot move a product
from one line to another because automation levels vary and each
product requires special tooling.
As it determines the number of units to produce for the upcoming
year, Production needs to consider the sales forecasts developed by
Marketing minus any inventory left unsold from the previous year.
4.3.1 Capacity
First-shift capacity is defined as the number of units that can be
produced on an assembly line in a single year with a daily eight-hour
shift. An assembly line can produce up to twice its first-shift capacity
with a second shift. An assembly line with a capacity of 2,000,000
units per year could produce 4,000,000 units with a second shift.
However, second-shift labor costs are 50% higher than the first shift.
Each new unit of capacity costs $6.00 for the floor space plus $4.00
multiplied by the automation rating. The Production spreadsheet will
calculate the cost and display it for you. Increases in capacity require
a full year to take effect– increase it this year, use it next year.
Capacity can be sold at the beginning of the year for $0.65 on the
dollar value of the original investment. You can replace the capacity
in later years, but you have to pay full price. If you sell capacity for
less than its depreciated value, you lose money, which is reflected
as a write-off on your income statement. If you sell capacity for
more than its depreciated value, you make a gain on the sale. This
will be reflected as a negative write-off on the income statement