Question

An industrial engineer believes a new data collection and scheduling system will improve shop performance. The system will cost $150,000 to purchase, and will require a class II employee to operate. Class II employees have a compensation package of $46,000 per year. The current scheduling system is operated by two employees costing $31,000 each per year. The benefits of an improved schedule are difficult to estimate, but the engineer is confident that work-in-process inventory holding cost will be reduced at least 33% from the current cost of $80,000 per year. The reduction in inventory will also reduce congestion and response time to meet customer orders. Current delivery times are ten weeks. The plant manager has agreed that a 50% reduction in production flow time would be as important as incurring the cost of the system. System life is estimated at three years. The company uses a minimum attractive rate of return of 17%. Should the engineer recommend purchasing the system?

Answer 1

The engineer should recommend purchasing the system if it provides a minimum attractive rate of return of 17% over its estimated three-year life.

Step-by-step explanation:

In order to determine whether the engineer should recommend purchasing the new data collection and scheduling system, several factors need to be considered.

The cost of the system is $150,000 to purchase, and it requires a Class II employee with a compensation package of $46,000 per year. Currently, the scheduling system is operated by two employees costing $31,000 each per year.

The benefits of the new system, such as reducing work-in-process inventory holding costs and improving response time to customer orders, make it difficult to estimate their exact value. However, the engineer is confident that the reduction in inventory holding costs will be at least 33% of the current cost of $80,000 per year.

The plant manager has agreed that a 50% reduction in production flow time is as important as incurring the cost of the system.

Based on the given information, the engineer should recommend purchasing the system if it provides a minimum attractive rate of return of 17% over its estimated three-year life.