THE UNIVERSITY OF NEW SOUTH WALESSCHOOL OF MECHANICAL AND MANUFACTURING ENGINEERING SULLIVAN’S FLOORING CONCEPT FINAL REPORT Bachelor of Mechanical Engineering June 2013 Group 16 Chuan Qin z3326752 Haipeng Lu z3328225 Sichun Zhou z3325210 Vincent Lim z3309837 Yan Wang z3326641 Xiaomeng Xie z3267281 Abstract In management of engineering projects and business, it is vital to know the appropriate tools to make the best decisions in choosing strategies. A case study for a flooring side venture owned by one Norman Sullivan was given. Norman Sullivan had came up with a new flooring concept which processes pinewood to duplicate the look of hardwood and with other techniques created an unique, rustic look at an affordable price. Increase in demand for this concept led Norman Sullivan to re-evaluate his current process and consider strategies to improve his process; the hiring of additional labor and the purchase of a router. An analysis of cost was performed to help make the decision regarding the choice of strategy. Following that, an analysis from a short term perspective with Present Worth and Rate of Return was performed. An analysis for a long term perspective consisting of breakeven analysis and Present Worth analysis with consideration of tax and inflation was also performed. The results of these analyses led to the same conclusion; that the hire of 2 labors is the best strategy. Group 16 2 Table of Contents 1. INTRODUCTION..........................................................................4 2. SULLIVAN’S BUSINESS................................................................5 2.1 KEY FACTORS OF SUCCESS............................................................................5 2.2 STRENGTHS................................................................................................ 6 2.3 RISKS........................................................................................................ 6 2.4 OPPORTUNITIES........................................................................................... 7 3. ISSUE ANALYSIS.........................................................................9 4. HYPOTHESIS............................................................................13 5. MACHINE COST........................................................................13 6. OTHER COSTS..........................................................................16 7. COST MODEL............................................................................18 7.1 SHORT TERM ANALYSIS...............................................................................18 7.1.1 Time Consumption..........................................................................18 7.1.2 ROR Analysis.................................................................................. 20 7.1.3 Present Worth Analysis...................................................................25 7.2 LONG TERM ANALYSIS..................................................................................27 7.2.1 Breakeven Analysis........................................................................27 7.2.2 Long Term Cost Models...................................................................30 MACHINE ROR................................................................................................ 33 8. DISCUSSION.............................................................................34 9. CONCLUSION............................................................................35 10. REFERENCE............................................................................36 Group 16 3 $6 per square foot was charged and earning margins are about 50 percent. Sullivan’s wood flooring business is a side venture. Four and a half hours per week are dedicated to board manufacturing while installation is primarily done on weekends. To contribute to the desired rustic look. 15 flooring jobs are projected for the coming year with an estimated 1 200 manufactured pine planks required. a carpenter based in London. At that time. Flow Chart Group 16 4 . Sullivan’s process in the manufacture of his floorboards is given in the flow chart below. Sullivan had acquired his skills in carpentry from working under experienced and skilled tradespeople and as of the spring of 2007. This concept was warmly received by his friend and spread by word of mouth. had acquired eight years of experience in construction. Introduction A study was conducted for Norman Sullivan. stained and finished it to have a similar appearance to hardwood.1. Plank Planing CutTrimming and Joint Construction Drill screw Sand & dowel + Inspect+ holes Final Modification 5min 1min mins 4min 4min 1min Figure 1. Another distinctive feature is his installation method which consists of securing the planks to the sub floor with several rows of screws visible on the board. Sullivan laid 12 inch wide pine planks. sanded to floor level. Sullivan’s new concept started from a construction of a friend’s guest cabin. Norman Sullivan had in the spring of 2007 been posed with decisions regarding the future of his new custom wood-flooring concept. To duplicate the hardwood. doweling was done where the steel screw heads are hidden by filling each screw hole with round wooden plugs. which allows him to work full time as a carpenter at Southwestern Ontario. rustic look which his friend wanted but was too costly to justify. Ontario. Sullivan’s uncommon use of pinewood gave a natural look for the flooring which in tandem to the doweling method that Sullivan used gave a more rustic look which led to Sullivan’s success in satisfying his friend. the customer.1 Key Factors of Success As in accordance with Sullivan’s business. Sullivan is considering the purchase of a router and the hiring of extra help. Sullivan’s Business Sullivan’s flooring business is a product based and service based type of industry. there is also a service component. Price is also a significant Key Factor of Success as the decision to use pinewood for his friend in Sullivan’s case was because hardwood was too costly. however. Hardwood floor costs up to 5 to 16 dollars per square foot. Thus. In addition to being time consuming. The Final Key Factors of Success is customer satisfaction. 2. Thus to improve quality and maintain consistent production. key factors of success of Sullivan’s floor business are unique design. An economic analysis will be conducted to derive the best combination of strategies that Sullivan could implement.The joint creation in the manufacture is one that Sullivan seeks to improve. The floor boards are self manufactured. thus a product was made for sale and as Sullivan will assemble floors for the customers. unique design. 2. competitive price and customer satisfaction. Unique design can be considered as customized floors are an essential component of the market. competitive prices and customer satisfaction have been identified as three Key Factors of Success for the flooring business. From Sullivan’s first success in customer satisfaction with this friend. pinewood only costs up to 6 dollars per square foot. Pinewood has significant advantage of price. The nature of the industry requires competitive edge in terms of product and customer satisfaction. it also required multiple adjustments for consistency and is prone to error. Group 16 5 . it started word of mouth referrals which led to rapid growth in his business. he has worked for highend project for wealthy family and professionals for many years. Through this. reliance on word of mouth advertising and risk of missed deadlines. His father and grandfather were also carpenters and hence there is positive family influence on his business as it can help establish a reputation for him. this is a self-owned company. Thirdly. 2. Sullivan was employed as a full time carpenter in a well-known design and renovation company therefore he knew a few people who might interest in his design concept. 2007) profit margin for competing hard wood products were found compared to the stated 50% margin for pine wood product. customers do not exactly know Group 16 6 . the pine wood product that is currently the main product of his business had a large profit margin. consumers are more likely to link him with high end and thus good quality even though his current product is of the cheaper option.3 Risks The risks associated with the business owned by Norman Sullivan in this case study have been identified as the following: undecided customers.B. Secondly. Through some research. quality variability. First of all. Sullivan has the access to a large amount of potential customers..2. which means that he has a lot of freedom in making decisions. High end usually suggests expensive products and good quality. Fourthly. Moreover. And finally. It is important to evaluate strengths to compare with existing competitors. he has a business degree and sale experience which should benefit his flooring business. himself as an owner and the company itself. strengths of his business could be seen in his product.2 Strengths Strengths of a business can be considered a business specific version of KFS. Undecided customers refer to the fact that in this market. lack of competition prevention. an average of approximately 40% (Albert D. Some businesses with a craft lineage use this fact to make it their selling point which Sullivan can also do. In Sullivan’s case. customers. Sullivan has a strong professional background. Thus. Purchasing a machine will improve the production efficiency whilst also improving the quality. since although the pieces are easier to handle by more people. he could not get a large market share due to labor and supply constraints and there is risk that full time competitors with larger economies of scale and supply capabilities would take him out of the market. Even without considering the consequences of quality variability. From the case study. reliance on word of mouth advertising. and further investigations. Extra labor hire can improve manufacturing efficiency but not quality. This risk is connected to the next risk. in that Sullivan could not prevent his rivals from copying his idea and getting a larger market share out of this concept. If anything befalls on Sullivan. This might lead to missed promised deadlines with customers and possibly lead to customer dissatisfaction. an important key factor of success. his reliance on word of mouth could also lead him to lose market share to future competitors who resort to standard method of advertising such as internet and newspaper advertising. the risk of missed deadlines results from his current one man labour process and also the time variability of his process.4 Opportunities Opportunity is defined as the possible external advantages that a company can use to achieve success. As his business is of a part time nature. the opportunities are considered based on two categories. there is no guarantee of stability for market share. lack of prevention competition.what they want. The next risk is quality variability which is an explicitly stated risk given by the case study. Finally. purchasing new equipment and/or hiring additional labors. his reliance on word of mouth advertising which he could not control could make him lose a large part of his market share out of negative word of mouth advertising from customer dissatisfaction. 2. In this business case study. If Sullivan’s quality falls. the handmade process still has the same capacity of product quality. two possible ways to solve this problem has been presented. Group 16 7 . This risk amplifies the risks of the next issue. no labour would be done and the progress of a project would completely stop. manufacturing products. Establishing a brand is another option Sullivan could adopt for his business when it has certain customer base or consistent production line which can ensure the production rate. Because the property of the material as softwood is less durable than hardwood.New construction procedures that can save manufacturing time while improving quality can also be developed. Proper service can give customer feedback and enhance customer loyalty and if Sullivan has yet to implement this. Advertising on newspaper. Sullivan can seek collaboration with other investors. the quality of the product needs to be enhanced. This can be achieved by either improving the manufacturing process as presented before or searching for raw material suppliers who would provide better quality products while maintaining lower or equal price. This additional access of resources can be in terms of both financial and technical areas. providing only manufacturing process or installation service and offering training for people who want to learn about softwood flooring. market survey may also be a good option to find out the customers’ needs and find potential customers at the same time. selling raw material to individuals. After Sales service can also bring extra benefits by providing extra income from maintenance service and selling and advertising of new products from this maintenance of relations. To increase revenue and profit. brochures. it would be a good opportunity. For a formal company. Furthermore. the more resources and the less risk the business will have. Group 16 8 . In addition. Sullivan has yet to employ marketing. Additionally. As a result. building a company website is a better way to introduce the company’s concept but may not be suitable to propagate recognition. every investor would be better off. There are also market share expansion opportunities that can be adopted. Among the opportunities he can exploit are. Partnering can be a method to supplement lack resources from each other. As more investors join in. providing after sales service is an indispensable item. or website are several general ways for doing marketing he could employ. where marketing is a common way to publicize company business. establishing a side business is a great option for gaining profit from each step of his process. Issue Analysis Issue Tree Inconsistent Material Supplies Inconsiste nt Production Unable to Deal with Increasing Demand Limited Production Capacity Non-standardized Manufacturing Process Limited Working Time Low Manufacturing Efficiency Limited Workplace Limited Storage Space Average Quality Longer Installation Time Waste of Time in Manufacturing More Services Required after Sale Figure 2. Group 16 9 . Instead of dividing this issue into whether he should hire people or purchase equipment. there is a different approach to focus on three other sub-issues: the inconsistent production. Therefore.3. Issue Tree The major issue Sullivan is confronting is that he is unable to finish all the expected work (i.e. the other changes that Sullivan can possibly make in the future are also included beside purchasing a machine and hiring labor.15 projects) in the upcoming year. limited manufacturing productivity and average quality. The last sub-issue. there are two hidden issues. secondly. purchase of a machine would both increase manufacturing efficiency and product quality. which can actually reduce the overall efficiency in three phases: manufacturing. It is relevant to the material and design concept. finally. Sullivan has to do all the works himself without much help from a machine. it takes longer to install the floorboards when there are not consistency in dimensions. which means Sullivan still has troubles to keep current production going in smooth and steady state. Moreover. Since pinewood is not the primary choice for most wood board manufacturers. the material supply may affect the production. there are possibilities to improve it to optimize design. expanding production and improving quality would be considered as the major goals since they are more relevant to Sullivan’s current problem than the others. The second sub-issue “limited productivity” is the most obvious one. though the manufacturing process of Sullivan has been confirmed. more floorboards need to be produced since there will be some faulty boards. Moreover. installation and after-sale.The first sub-issue is the “inconsistent production”. hiring part-time labor would be a good option. First of all. the limited working time and low manufacturing efficiency are the key components. In terms of increasing working time. which are due to the lack of a large workshop. limited working and storage space. average quality is considered as a hidden issue. Group 16 10 . In this report. shorten the production time and improve current quality. Since this is only a side venture. On the other hand. the after-sale service volume will increase. several steps can be fulfilled by mechanism. due to the increasing customer demand. The reliability will be improved by quality check. Therefore. Group 16 11 . average quality and limited production capacity. like joint method. the appearance and sturdiness can be developed. inconsistent production. as the quality of the product is improved. Through modifying the assembling process. the quantity and quality of the product will be improved. Customer survey and interview are two methods to conduct the market analysis. By investigation of the production line. Sullivan could gain larger market share if the production is consistent. the manufacturing process could be modified. Additionally. this case includes three sub issues. Sullivan will be more competitive and establish a better reputation.Table1: Issue Analysis Framework As it has been illustrated in the previous part. To begin with. After introducing cutting and drilling machines. therefore. the production would be expanded and capability would be boosted. When Sullivan has enough customers. due to the limitation of the production capacity. These analyses may not be carried out at the same time. After the improvement of production. gain larger market share. technology trend analysis and process capability analysis. By hiring more labor and utilizing new production process. The manufacturing process analysis needs to be done to increase the capability. Reliability guarantees the quality of the products. The analyses shown above include manufacturing process analysis. the market analysis could be introduced to expand the market and looking for potential customers. new technology and process capability analysis would be conducted to increase the capability again and.Moreover. reliability analysis. Sullivan can meet the increasing demand and gain larger market share if he increases the production capacity. market analysis. The market analysis is carried out from the perception of customer and their feedback. Group 16 12 . Moreover. two hypotheses would be considered.4. Figure 1 below shows the capability of the router and as can be seen. CNC being an abbreviation for Computer Numerical Control router. Sullivan’s task shown in exhibit 1would not be more complicated than the bottom shape’s. 5. Hypothesis In our case study. The price of a low-end 3-axis CNC router is about 4000 dollars as we can see from the bottom table . Group 16 13 . Thus a 3-axis machine would be more than enough. hiring multiple workers would be considered rather than buying more than one machine since the setup price of machine is much higher than labor cost. They are purchasing a router and hiring part-time labor. Figure 3: 3-axis machine cut capability Exhibit 1. Sullivan’s concept board By considering Sullivan's workload. the CNC router type is chosen. Machine Cost Machine Selection Sullivan has a table saw already and he is looking for a suitable router to construct joints for his pinewood boards. Even a do nothing approach and performing both the purchase and hiring would be discussed as well. 000 3 Low end CNC router: limited in size and $25.000-$50. 2013) CNC Router Price range Axes Comments Lower than $4000* 3 Hobby CNC router $4000-$25.Table 2: CNC Router Price (CNC Router Resource.000 3 or 4 materials Middle-Range CNC router: signage and panel $50. 2013)is selected. The purchase cost is $5000.000-$100. Group 16 14 . a multiple function CNC wood routers from Jinan Huawei CNC Router company (Alibaba.000 4 or 5 Highest end CNC router: Heavy-duty machinery use Finally. shown in the table below.000 4 or 5 work High end CNC router: wide variety of uses More than $100. Maintenance and repair fee is approximately $600 per year and the electricity cost is $52 per year based on its power rating and London Electricity rate. which has been list in the table below.Table 3. the installation time is halved and there will be no faulty boards and the manufacturing time is reduced into 11 minutes per board. Finally. there is a possibility that the potential customer number will increase. because of the machine can create more unique looks for the floor board. Jinan Huawei CNC Router Specifications Voltage 380V Power(W) 5kw Weight 1700kg Working area 1300*2500mm 1. Table 4: Machine Price and Costs Estimated Cost Actual Cost The router $4000 $5000 Maintenance and repair $800 per year $600 per year Electricity $400 per year $ 52 per year The outcomes of the machine are similar to Sullivan's expectations. Group 16 15 . With better board quality. an average the electricity fee 6.55 cents 2 per kWh was done. Firstly. Other Costs Some basic information regarding the costs needs to be clarified.2/L in Canada (Alter. Group 16 16 . We can see from Table 6. costs 10. it used 12L of gasoline every 100km (US Department of Energy. 2013). Secondly.0 car. 2013) Since Sullivan has full time job and can only work 4. costs 6.7 cents (Ontario Energy Board.4 cents per kWh.Table 5: Machine Outcomes Installation time 50% faster than before Manufacturing time Reduce to 11 min per board (originally 15minutes) Improving quality No faulty board in manufacturing (originally 2% defect rate) Design flexibility Potential customer number increase from more design capability Increase in price for unique look 6. It can be calculated that for every 100 km.5 hours per week. therefore. and off-peak which is after 7pm of weekdays and weekends. We assume Sullivan has a Ford 4.4 =8. it was found from that gas price is $4. Thus.5/gallon which is $1. 2012). it is assumed that he does his flooring business half time on mid-peak period and half time on off-peak period. London Ontario. Electricity Rate that mid-peak which is 7 am to 11 am and 5 pm to 7 pm of weekdays.7 +10. the electricity fee was derived from the official website of London Ontario Electricity Rate Canada. Since we know from the case study that each plank size is 10ft X 12 inch convert into cm is 300. the weekly work hour’s limit is 48 hours and Sullivan’s labor only works 4.09m /ft ft . labor cost is considered as $2 /hour for 4.5 hours per week. Thus. Table 6. we can conclude that each plank has revenue 2 0. In addition. Electricity rate (Ontario Energy Board.25 per hour per labor where Sullivan’s labor cost is higher than this (Ontario Ministry of Labour. 2013) Period On Peak Group 16 Time Weekdays:11 AM to 5PM Rate 12. This can be concluded as $100 per week per labor. Finally. such as the minimum wage of $10. In addition. the gasoline cost is 50km X 4 X b X $14. with rest periods considered into it. It is known that each plank has size of 1 foot square. London Ontario. an approximate single travel distance of 50km was assumed. a normal person’s rate of defect is approximately 5% as a rule of thumb (Wallender.5 hours per week as Sullivan estimated in the given case study.916 m $6 × 2 =$ 61. we assume Sullivan needs to go to their house twice which means two return travels. Moreover. All the basic information is shown below in Table 7 (Miscellaneous Background Information) Moreover. For each customer.Sullivan’s car costs $14.48 cm X 30.4cents per kWh 17 .916 meter square. a rate of defect for Sullivan in his floor board manufacture is 2%. Therefore. an assumed half the rate of defect is deemed reasonable. 2013). Sullivan has $6 profit. as Sullivan is an experienced carpenter. the distance Sullivan needs to travel for each project can be calculated as 50km X 4.27 for gasoline. 2013). the second round is for assembling the floor. Therefore.08 2 2 0. the first round is for measuring and surveying of the house.08.27/100km X100 where b is the number of projects.48 cm = 0. revenue of each plank equals to $61. Sullivan’s business satisfied all regulations of The Ontario Employment Standards Act. 7.1 Time Consumption The short-term analysis for different alternatives depends on the time required to accomplish the 15 projects. The average manufacturing time per piece decides the total time needed.08/plank 2% 7.1.1 Short Term Analysis 7. Cost Model Having established the costs of various aspects of the business. Miscellaneous Background Information Electricity Gasoline Revenue Failure rate $8.7 cents per kWh Table 7. one for the short term and another in terms of long term.55 cents/kWh $28.4 cents per kWh 6. the manufacturing steps for all alternatives are distributed by line-balancing method. a cost model can now be developed. when Sullivan is the only operator. In this case. according to the case study is presented below: Group 16 18 .54/project $61. The original time for each step. The analysis is differentiated into two perspectives. Therefore.Mid Peak Off peak Weekdays: 7 AM to 11 AM and 5 PM to 7 PM Weekdays: 7 PM to 7 AM Weekends and Holidays – 24 HOURS 10. short term is taken to be in the coming year while a study period of five years was taken for the long term analysis. in alternative one and two. For example. the time for other labour(s) used the same amount of time respectively so that the one piece can be manufactured in 9 and 5 minutes correspondingly. For ease of analysis. The line-balancing for all the alternatives is shown in table 8 (Manufacturing Steps and Time): Table. Sullivan needs 9 and 5 minutes respectively to finish his part of job. Flow Chart In allocation of labor.Plank Planing CutTrimming and Joint Construction Drill screw Sand & dowel + Inspect+ holes Final Modification 5min 1min mins 4min 4min 1min Figure 4. 8: Manufacturing Steps and Time Task Task Time (Labor) Task Time (Machine) Task Description Task That Must Precede A B C 5 1 4 N/A N/A 3 A B C D 4 1 Planning Cutting Plank Trimming and Joint Construction Drill screw & dowel holes E 1 N/A D E Sand + Inspect+ Final Modification Total 15 min Group 16 11 min 19 . the manufacturing time for other laborer(s) matches the time the Sullivan needs for the process. the more tricky steps such as trimming and joint constructions that require more technical skills are assigned to Sullivan since he is more experienced and would not make errors. C. Each year has 52 week (including public holidays). E Sullivan A.5 hours each week outside of his full-time job working time.2 ROR Analysis Do Nothing Based on the information provided by the case study background. E A. as a result. the time for each project to finish is roughly 5 weeks. the maximum project number can be finished is 10. 5: Precedence diagram Table. 2013 ) Stations Task Task Time (min) Unassigned Time Cycle Time (min) 0 idle 15 Do Nothing Sullivan A. E 15 Alternative 1 (one labor) 9 0 idle 6 3 idle Alternative 2 (two labor) 5 0 idle 5 0 idle 5 0 idle Alternative 3 (one machine) 11 0 idle Sullivan Labor C. The calculations are considered as consistently evenly distributed for the corresponding costs and revenues. D. D. E Alternative 4 (one labor & one machine) B. The manufacturing time per plank for the original plan is 15 min/plank so that the required manufacturing time per project is 20 hours. C A D. Group 16 20 . B. B. E 6 0 idle A 5 1 idle Sullivan Labor 9 5 11 6 7. B Sullivan Labor 1 Labor 2 B. C. C. 9: Process Combination (Konnully. D.A 5min B 1min C 4min D 4min E 1min Figure.1. the 15 projects require approximately 1200 planks so the planks required per project should be 80 planks. Because Sullivan can only work 4. D. The monthly fuel cost can also be calculated as follows.46 /month Group 16 21 . costs of different aspects can be worked out. the revenue.21 → $ 0.27/100 km km (total ) =10× 4 × 50 km=2000 km/ year C ost fuel = $ 14. Fuel cost = $ 14. The operating time for the table saw during the trimming procedure takes 4 minutes. Revenue per year =$ 61.4/ year → $ 23.44 week ≅ 5 week 60 52 week ÷ 5 week =10. Therefore.08 / piece ×80 piece ×10 projects=$ 48864 / year Revenue per month =Revenue per year ÷ 12=$ 48864 / ye ar ÷ 12=$ 4072/ month The electricity cost for the original plan is the electricity consumption of the table saw which has maximum power of 1800w. the average travel length for delivery/ measurement of each project is 50km and the fuel cost has been presented as well.5 hour /week=4. Electricity cost = Cost Elec= 10.68/month 1000 60 Based on previously stated assumptions in section 4 (Cost Background).27 20000 km × =$ 285.34 Cen/kWh 1800 W 4 × hr × ( 80 ×10 ) × 8. the corresponding monthly electricity cost can be calculated.78 /month 100 km 100 km ∴Cost total/ month=Cost Elec + Cost fuel =$ 24.55Cen/kWh=$ 8.80 piece / project × 15 hour =20 hour → 20 ÷ 4.4 projects ≅ 10 projects Based on the manufacturing time per plank and the total projects can be finished in the coming year. This gives the original plan the cash flow distribution diagram. ×Cost per plank =2 × ( 80× 10 ) × $ 30.The assumed defect rated is 2%.Cost material +Cost fail item )−Total Cost monthly ( P/ A . the cost for that is: Cost failitem =Fail items No . Period ( month )) + Revenue monthly ( P/ A . i ¿ .64 The total capital cost in this case is the material cost only which is: C . Figure 6 Cash Flow Diagram The equation used for ROR analysis is: 0=−PW D + PW R PWD: present worth of costs or disbursements PWR: present worth of incomes or receipts Then the equation for DN alternative is listed as: 0=−( C .54 / plank ×(80 ×10)=$ 24432 In the rate of return (ROR) analysis. the cost for electricity/fuel and the revenue are counted as monthly. Period (m Group 16 22 .54 per plank =$ 488. Cost material =$ 30. but the cost for fail item and purchase for material are counted as capital cost. i¿ . Revenue and Salvage Group 16 23 .67 2 15 7 Alternativ e 3 (1 Machine) 11/60 14. the salvage value of the machine needs to be considered after the period finishing the projects. However. The equation used is: Salvage=Capital Cost × ( 1−i )=$ 5652× (1−0.Other Alternatives The calculations for other alternatives are done through the same procedures but depend on various manufacturing time for each independent situations. Manufacturing Time Time Manufactur ing time/plank( hr) Time/proj ect (hr) Time/proj ect (week) Number of Projects Total Manufactur ing Time (month) Alternativ e 1 (1 Extra Labor) 9/60 12 3 15 11 Alternativ e 2(2 Extra Labor) 5/60 6.3 15 12 Alternativ e 4 (1 Extra Labor + 1 Machine) 6/60 8 1. The salvage value depreciates at a rate of 25% in accordance to the declining balance method.78 15 7 The revenue for the four additional alternatives follows the same procedures as for the DN.67 3.25 )=$ 4239 Table 11. Table 10. 08 1200 73296 11 6663.Revenue Revenu e/plank ($/piece ) Number of Planks Total Revenu e ($) Time/proje ct (month) Monthly Revenue ($/month ) Salvag e ($) Alternative 1 (1 Extra Labor) 61. Costs Cost Electrici ty Cost ($) Group 16 Fuel Cost ($) Monthly Labor Cost ($/month Time/p roject (mont h) Total Monthly Cost ($/mont Capit al Cost of Capital Cost of Materi al ($) 24 Fail Item Cost ($) .08 1200 73296 7 10470. but the manufacturing period and subsequently the monthly cost are different.08 1200 73296 7 10470. Table 12. The capital costs for alternatives with machine contain the extra cost for the purchase of the machine.86 Alternative 3(1 Machine) 61.08 1200 73296 12 6108. the factors dependent on the number of project such as electricity cost and fuel cost are solved based on finishing the anticipated 15 projects thus the total costs for these two are the same for the additional alternatives.86 4239 For the cost section.27 Alternative 2(2 Extra Labor) 61.00 4239 Alternative 4 (1 Extra Labor + 1 Machine) 61. 92 12 36.20% Alternativ e 4 (1 Extra Labor + 1 Machine) 13. i . i ¿ .04 7 902.1 h) 420 11 840 Machi ne ($) 460.9 6 36648 732.13% 11. Period ( month ) )+ Revenuemonthly ( P/ A .9 6 The Equation used for solving ROR for these four additional alternatives is similar to the one used for DN: +C .9 6 36648 732.1 Alternativ e3 12.312 428.) Alternativ e1 12.85% 25 .66% 17. Cost material +Cost fail item(¿)−Total Cost monthly ( P / A . Cost machine C .70 420 7 482. the ROR can be solved and presented in the table below: Table 13.92 5652 5652 36648 732. Short term ROR ROR Group 16 Do Nothing Alternativ e 1 (1 Extra Labor) Alternativ e 2 (2 Extra Labor) Alternativ e 3 (1 Machine) 12. Period ( month )) ( 0=−¿ ¿ The cash flow distribution diagrams for the additional four alternatives are the same with the one used in DN.1 Alternativ e4 12.312 428.14% 9.312 428. By substituting the corresponding values into the equation shown above for each case.1 Alternativ e2 12.9 6 36648 732.312 428. the effective interest rate is 10.47 where.i=(1+ r 10 ) −1= 1+ m 12 ( 12 ) −1=10. by applying the command for each case. An Excel command is used to derive the Present Worth.3 Present Worth Analysis Present worth is the equivalent present value of the money that will be earned in the future. Therefore. Substituting and solving the equation for the effective interest yields the following result: m Effective . It is solved based on the assumption of the Minimum Attractive Rate of Return (MARR) is 10%. Short Term Present Worth for Different Strategies Strategy Group 16 Do Nothing Alternative 1 (1 Extra Labor) Alternative 2 (2 Extra Labor) Alternative 3 (1 Machine) Alternative 4 (1 Extra Labor + 1 Machine) 26 . The data for all options has been calculated and presented in the ROR section as well.47%. It is essential to the cost model analysis it is because the alternative that has the highest present value is has the great chance to be the best solution for this short-term business analysis. year ¿ cell . In this short-term analysis. Therefore. The corresponding Excel equation/command used is: CF CF PV =P+ NPV (i . the results of present values are shown in the table below: Table 14. the frequency is set to be monthly so m is 12 as there is 12 month in a year.1. The analysis for present worth for all the alternatives uses the same basic cash flow distribution diagram presented in the ROR analysis section. r is the MARR and m is the analyzing period. The decisive strategy for the short term will be made based on results of both Present Worth and ROR analysis.7. last ¿ cell) The i% is the effective interest. 79 In the short-term analysis. alternative 2 (hiring two extra labours) has the highest result in both of the sections. because hiring two labours has the highest values in both ROR and present value. This is due to the high production efficiency that takes the shortest manufacturing time per plank (5min/plank). Since the options with purchasing new machine require much higher set-up costs. Observing the result data in ROR analysis and present value analysis. these options are not recommended. the cost of company permit fee. for short-term analysis with certain project numbers.77 -314. In conclusion. Group 16 27 . and since the maximum manufacturing period among all the alternatives is one year. the options with less fixed cost bring more profits.05 2909. tax. the maintenance fee for the machine is not counted either. In addition. and it takes the shortest manufacturing period for accomplishing the 15 projects. the assumptions of providing consistent production and evenly distributed tasks per month are made during analysis. The machine requires maintenance every one year.31 7767. it is the best option for Sullivan for finishing the anticipated 15 projects in the coming year.PW ($) 2658.39 9199. Furthermore. and inflation are not considered. 1 73296 The cost of each strategy from a long perspective is given in the table above.36 0 61.6 15 47618. The newly considered variable fee is permit fees derived from the Canadian Home Builders’ Association. 2013). 6 0 61. Costs of Strategies with Long Term Considerations Cost($) Variable Cost Capacity Cost Total Revenue Alternatives Set Up Cost ($) Labor Cost ($ per year ) Land Lease Cost ($ per year) Maintenance Cost ($ per year) Router Electricity Cost ($ per year) Suggested Advertising Cost ($ per year) Insurance ($ per year) Material Cost ($ per project. fixed costs which are independent to project capacity. 2013). 2 boards/project) Project Capacity Annual Operating Cost Total Total Revenue ($) 1 1 Machi Machin 1 ne + 1 2 e Labor Labor Labor -5000 0 -5000 0 0 -2600 -2600 -5200 7920 7920 7920 7920 600 0 600 0 52 0 52 0 500 90 36648 500 90 46420.6 .26 2610 827. Wallace Ltd. transport. 7. calculated by the projects capacity times the permit fee per project.1 1710 542.66 3060 970. Fuel Cost ) Waste Piece Cost ($ Total. utility. 46 24 14170 166137 5. labor. maintenance and waste piece cost. some costs are at the same rate such as the material cost. On the other hand new costs considered include land lease (Loopnet . 14 92841.54 per board) Permit Fee ($ total. advertising and insurance (Ian W.7.2. 8 1350 428.08 29 34 75910. 8 500 90 83068. $30. $90 per project) Transport Cost ($ Total.2 Long Term Analysis Table 15.08 19 54682. 90538.1 Breakeven Analysis Group 16 28 . Similar to the short term analysis. 8 500 90 70852. advertisement cost. the intersection point of lines are not clear from the graph above. AW vs Quantity 120 100 80 1 labour 2 labour AW. breakeven analysis using annual worth (AW) method was carried out for this purpose. it is important to conduct analysis in consideration to this fluctuation of demand. Only costs related to labor and Group 16 29 . Setup cost. Therefore.patrol cost. all the common AW factors were eliminated. Relationship between AW and quantity However.land lease cost.machine maintenance and electricity cost) The graph below illustrates the total AW of each alterative verse the number of jobs per year. of jobs per year Figure 7. no of years. as differences between the AW of each alternative are relative small compared to total AW values. AW values were converted to positive. AW values of each alternative were calculated referring to the above table. Salvage value). no.For long-term analysis. As a result. as demand is changing constantly through time.electricity cost. The following equation applied in this analysis uses Excel. AW=ABS (PMT (MARR. The maximum capacity of each alternative was taken into considered.material cost.insurance cost.building permit cost.round(time to finish one job)*labor rate*labor number. thousand dollar per year 160 machine 1 labour+ 1 machine DN 40 20 0 0 5 10 15 20 25 30 35 40 Quantity. 77*x*100 0 652 0 15.82% 15.82 % Therefore. AW=ABS (PMT (MARR. number of jobs per year 1 labor+ 1 machine 5000 5 DN 0 5 1186 100 1. The table below demonstrates the factors considered in the long term analysis.5*x*10 labor cost) 00 0*2 0 machine maintenance and electricity cost 0 0 652 MARR（after tax + inflation 15.67 1. the AW values were also converted to positive. Table 16: AW factors related to labor and machine 1 machi 1 labor 2 labor ne Setup cost 0 0 5000 years 5 5 5 salvage value(after 5 years) 0 0 1186 labor rate($/week) 100 100 0 output (week/job) 2.machine were taken into account. Salvage value) . Setup cost.77 0 0 4.5 3. As noticed that.machine maintenance and electricity cost) The following figure shows the machine and labor AW factors using quantity as a variable.44 1.82% 15. no of years.26 variable cost(total 2.82 adjusted) 15.82% % *x=quantity.67*x*1 1. Group 16 30 .round (time to finish one job)*labor rate*labor number. the equation applied was adjusted as followed. no. of jobs per year r Alternative chosen 0-10 DN 11-15 1 Machine 16-20 1 Labor 20-29 1 Labor and 1 Machine 30 and above 2 Labor It could be seen that the alternate of do nothing is suitable for the number of projects below ten.AW(machine + labor) vs Quantity 16000 14000 12000 10000 8000 labour per year 2 labour AW. Relationship between AW(machine + labor) and quantity Observing the points of intersection yields us the table below. the alternative of two labors can meet the requirement. Group 16 31 . no.1dollar 6000 1 machine 1 labour+ 1 machine DN 4000 2000 0 0 5 10 15 20 25 30 35 40 quantity. of jobs per year Figure 8. Table 17. of Quantity. For more than 30 projects. one machine would be the best option. If the number of project is between 11 and 15. Decision Table based on AW breakeven analysis No. 329.36 The Present Worth value is derived from the excel command P + NPV(i%.90 $25.599.599.46 $38. Table 19.year_1_CF_cell.46 2 Labour Hire CFBT $0.14 $60.36 $75.447.2.14 $60.00 $75.00 $60.159.7.159. table 17. CFBT is given by the following equation.599. Cash Flow Before Tax Year 0 1 2 3 4 5 Machine CFBT -$5.633.46 $38.000.46 $38.159.46 $38.90 $26.e. the cash flow within the next five years for all strategies are derived and presented in the table below.00 $38.329.90 $25. last_year_CF_cell) Applying this command to the CFBT yields the Present Worth values tabulated below.447. The Present Worth values Strateg y Group 16 Machine Purchase Machine Purchase and Labour Hire 1 Labour Hire 2 Labour Hire 32 .447.000.329.329.36 $75. CFBT = GI-E-P+S GI = Gross Income E = Expenses P = First Cost S = Salvage Value Consequently following the equation.159. Cash Blow Before Tax.447.42 Machine & 1 Labour Hire CFBT -$5.90 $25.36 $75.14 $60.66 1 Labour Hire CFBT $0.599.159.516.599.2 Long Term Cost Models Present Worth with Tax Analysis The first step in a tax analysis is to determine the CFBT i.14 $61. Table 18.00 $25.36 $75. The Cash Flow after Tax (CFAT) for every strategy had been put in the table 18 constructed from Excel.71 $22.168.D) Te (Voorthuysen.36 $33. (Government of Canada.36 $33.34 $66.235.78 $23.325. 10% $91.906.07 $52.000.168.168.168.00 $22.399.S & L Rate)*(Federal Rate) (Voorthuysen.399.95 $22.906.906.944.05%.286.07 2 Labour Hire CFAT $0.PW.399.07 $53.05 $144. 2013) Following that. Depreciation in this case is considered using the declining balance (DB) method at a rate of 25%.756.581 .257.399.000.475%. Cash Flow After Tax Year 0 1 2 3 4 5 Group 16 Machine CFAT -$5.93 $22. 5 years.99 $224.36 $33.168.00 $66.34 $66.00 $52. The Cash Flow After Tax is given by the equation below: CFAT = CFBT – Ti (Te) = GI – E – P – S – (GI .96 $286.878.86 $33.257.00 $0.84 Machine & 1 Labour Hire 1 Labour CFA T Hire CFAT -$5. 2013 ) *Te = Effective Tax Rate *S & L Rate = State and Local Rate The equation gives us an effective tax rate of 12.906. the effective tax rate identified by the equation Te = (S & L Rate) + (1.07 $52.34 $66.E. 2013 ) *D = Depreciation Table 20.34 $66.36 $33.38 Research of Canadian tax rate has identified a federal tax rate of 15% and a state tax rate of 5.34 33 .399.654.07 $52. Present Worth After Consideration of Tax and Inflation Strat egy PW Machine $68. inflation and interest rate at Canada of 2007 being 3% and 3. the adjusted MARR. the 2 additional labor hire has the most present worth value.5% respectively (Trading Economics .541.year_1_CF_cell. last_year_CF_cell) With i% being 15. P + NPV(i%. it yielded the Present Worth values given in Table 19.98 As one could observe from the table. 2013).438. Machine Yearly Cash Flow and RoR Ye ar Group 16 1 Machine Cash Flow 34 . given by If = i + f + if (Voorthuysen. After taking into consideration of this new MARR and then calculating the PW for CFAT with the excel command below.825%. it is observed that the effect of tax does not significantly affect the choice of strategy. which is also the case for present worth before tax and inflation considerations.806.28 $217. Taking into consideration of inflation.725. as there are very large differences in cash flows for each strategy. With the tax analysis. 2013 ) *if = MARRf *i = real *f = Inflation became 15.69 2 Labour 1 Labour Hire Hire $109. MARRf.825%.An original Minimum Attractive Rate of Return (MARR) of 10% was assumed for Sullivan’s strategies as the case study stated that he would be satisfied for 10% rate of return from his machine. Table 21. Machine ROR Table 22.08 Machine & 1 Labour $169. for the cost is the lowest while the present worth is still high. which is nearly doubled at the 5th year. To sum up. based on breakeven analysis.9 25864. machine will not be purchased.5% with just the purchase of one machine. One problem in making a decision is the lack of information regarding projection of future demand. it was stated that a Rate of Return of 10% is acceptable to justify the purchase of the machine. thus in preference to 2 labor hire strategy. however there are many circumstances Group 16 35 . the alternative of one machine and one labor would be the best option. but also has the highest present worth. the alternative of two labors can better fulfill more than 29 projects each year.9 25677. However. The long term present worth analysis assumes that demand fulfills each strategy’s project capacity. 2 labor hire in conjunction with purchase of the machine might give good results as well. the decision of which strategy to use can be determined.9 25677. the alternative of 2 labors would not only complete the tasks. Discussion In conjunction with the earlier analysis with present worth. additional hire of 2 labor gives better results in terms of Present Worth and also without any set up costs.42 513. considering the situation that Sullivan has 15 projects in the coming year and the number of customers reaches 29.0 1 2 3 4 5 Ro R -5000 25677. Calculating the yearly cash flow and using the IRR Excel command to find the Rate of Return for the purchase of machine gives a rate of 513.50% In the case study. Going beyond the scope of the case study. However. 8. If Sullivan has sufficient customers.9 25677. thus eliminating an aforementioned risk of losing out in market share. labor hire of this nature also offers flexibility. The hire of labor safely covers the risk of missed deadlines that was a problem before as well.that might prevent this. In addition. the workers due to being hired in casual basis can be put on leave until they are necessary. In the event that Sullivan was wrong about his approximation of future potential jobs. In addition to generating the most cash flow. The only issue Sullivan might need to be careful is quality control for his labor. Group 16 36 . On the other hand. The breakeven analysis was used to help in this problem. he could use the breakeven analysis to choose which strategy is best based on volume. if Sullivan gathered enough data to be able to accurately predict the number of jobs he would have in year. analysis from a short term and long term perspective has given the conclusion that 2 labor hire theoretically gives the best benefit given the appropriate conditions. as the most cash flow and value is generated. it allows Sullivan the greatest amount of project capability and the ability to get the largest market share with his new concept. this strategy also gives him flexibility in cost saving should his approximations of future customers fall short due to unforeseen circumstances. In addition to having more worth in the short and long run. he could refer to the breakeven analysis table results which gives the best strategy worth depending on the volume of jobs per year. the additional hire of 2 labors is the strategy Sullivan should adopt. Group 16 37 . Conclusion In conclusion.9. With accurate data regarding the volume he would have each year or limiting himself to a number of projects per year. without more accurate data on demand for Sullivan’s concept. (2013). Retrieved 04 11.craftinsurance.alibaba.co.com/canada/interest-rate Forintek Canada Corp.html Alter. From Trading Economics : http://www. (2012). (2013). J. Steadily Improve Your Wood Flooring Business Over Time.com/product/815161387215879358/Multi_Functions_CNC_Router_Engraving_Wood_and_Marble_Stone _Machine. from http://www. Employment Standards. Retrieved 2013. Wood Flooring.com/Intl/Canada/Ontario-Commercial-RealEstate/ Ontario Energy Board.labour.craarc.com: http://jnhwcnc. from Solutions for Wood: http://www. 2013.loopnet. (2007).ca/english/es/ Group 16 38 . L.68 per Gallon and they can't blame Obama. (2013). from Slide Share: http://www. Multi Functions CNC Router.uk/Company-profile/ Konnully.ca/OEB/Consumers/Electricity/Electricity+Pric es Ontario Ministry of Labour.solutionsforwood. Retrieved from Loopnet : http://www. B. from Ontario Energy Board: http://www. (2013). (2006). Alibaba (2013).on. Retrieved 2013 from Alibaba. Retrieved 2013.gc.en.net/JosephKonnully/assembly-linebalancing Loopnet .com/articles/article.com/environmental-policy/gas-prices-canada-hittingrecord-highs-us-568-gallon-and-they-cant-blame-obama. Ontario Industrial Properties For Lease.gov. Wallace Ltd.treehugger.tradingeconomics.slideshare. (2013). Canada Revenue Agency. (2013). (2013). Retrieved from Craftsmen Insurance : http://www. Craft Insurance . U$5.aspx?articleid=176&zoneid=4. from What are the income tax rates in Canada for 2013?: http://www.html Ian W.ca/tx/ndvdls/fq/txrts-eng. Reference Albert D. from Tree Hugger: http://www.pdf Government of Canada.com/_docs/reports/Flooring_Sector. Gas Prices in Canada Hitting Record Highs. Electricity Prices. What is assembly line balancing? Retrieved 2013.html Canada Interest Rate . 2013. Retrieved 2013.ontarioenergyboard. Retrieved 05 11. Retrieved 2013 from Hardwood Floors: http://hardwoodfloorsmag.10. Sydney : McGrawth Hill . V.com/canada/interest-rate US Department of Energy.com: http://homerenovations. (2013). Canada Interest Rate . How much hardwood flooring to order. (2013 ).com/od/hardwoodfloor/a/HowMuch-Hardwood-Flooring-To-Order.htm Group 16 39 . E. Wallender.gov/feg/bymodel/2011_Ford_Ranger. Retrieved 2013. From Trading Economics : http://www. Retrieved 2013.shtml Voorthuysen.fueleconomy. (2013).Trading Economics .tradingeconomics. from About. (2013). Engineering Managment . Fuel Economy of 2011 ranger.about. L. from Fuel Economy: http://www.