Reference no: EM133677249

Question: XXYY has 12 production lines with a max. capacity (Actual O/P) of 400,000 bottles of juice per month. During 2022, the capacity of the factory critically covered the market demand. It is forecasted that within two years, annual demand will increase by 7% and the company might face a problem to cover the expected demand in the future. Thus, it seems critical to rethink to increase the capacity to meet future demand. Operations manager proposed two capacity alternatives to increase their capacity. The first alternative is to buy a new production line. The second alternative is to outsource and to deal with a third-party producer. The following table indicates the annual fixed and variable cost per unit of each alternative:

Buy a new line Outsourcing
Fixed cost EGP 12,000,000 None
Variable cost EGP 11/bottle EGP 13/bottle
Besides, for the short term, there is a need to reconsider the use of the company resources while maintaining the same quality of their products. Accordingly, the operations manager proposed a process improvement initiative that reduces processing time for each bottle (The company operates one shift of 8 hr./day with 25 days/ month), so that output is increased by 15%, but 8 additional workers required for each production line. Originally, 15 operators are needed to operate each line (12 production lines). Operator costs are EGP 16/hour, and material input is EGP 3/bottle and operating line cost EGP 375/hr. Overhead is charged at 1.5 times direct labour cost (before and after the proposed initiative). As a member of the improvement team, you are required to assess the feasibility of the proposed initiative with respect to its effect on the productivity of the production lines (assume that the output is evenly distributed among the 7 lines).