Total Costs 1 Running Head: COMPARING TOTAL COSTS

Comparing Total Costs Gerald Brickert Colorado Technical University MGMT640 Phase 2 Individual Project Professor Thomas May 27, 2011

Total Costs 2 Abstract In order for an organization to make an educated decision on what manufacturing process to use (both for now and for future growth) the total costs for each of the different processes must be determined based on historical data, current costs, and estimated future production levels. Even though it is a prediction of future costs, with careful use of available data a reasonably reliable numerical picture of the associated costs can be developed to aide in the decision making process.

Total Costs 3 Comparing Total Costs The given scenario is:Smitheford Pharmaceuticals leadership has narrowed the manufacturing process decision to two options. The first is a higher technology option in one location, and the other is a lower technology option in several locations. The following questions need to be answered in order to make a more educated decision on which path the company should follow:

The following data on costs and production levels are used to determine annual costs:

Total Costs 4 Using the information given in the chart and using the total cost formula, the questions presented can be answered with reasonable accuracy (though some assumptions such as future production rates must be made) which helps to guide management in their decisions. Starting with the first question on lead cost alternative: Defining the term lead cost alternative is relatively straight forward, comparison of the total costs between options to see which has the lower costs. This method can be used across a specific timeframe in order to determine which method or process has the lower costs over time. The following formulas are used: Total Cost =Fixed Cost + Variable Cost. Variable Cost = Units produced times the variable cost per unit (Brown, n.d.) Calculating total cost for the two options for Year 1, Year 5 and Year 10 are shown below:

(Nurre, n.d.) Based on the data given in the chart and using the total cost formula, in the first year, the manual process is the lead cost alternative since the total production costs are less.

Total Costs 5

(Moffat, n.d.) Based on the data given in the chart and using the total cost formula, in the fifth year, the manual process is the lead cost alternative since the total production costs are less.

(Nurre, n.d.) Based on the data given in the chart and using the total cost formula, in the tenth year, the high technology automated process is the lead cost alternative since the total production costs are less. This demonstrates a shift in costs that occurs as the number of units produced increases since the costs are spread out over a larger number of units.

Total Costs 6 From the start the fixed costs for high technology processes are considerably high than the lower cost (based on lower labor costs) manual process. If the variable costs per unit of production could be reduced, the timeframe for implementing high technology processes centrally located would shift, making the transition time much sooner. By calculating costs, it can be determined what the variable costs would need to be in order to justify transitioning to high technology equipment and processes sooner (in this case, at year 5).

(Brown, n.d.)&(Nurre, n.d.)

Total Costs 7 Based on the given data and the total cost formula, in order for the high technology process to be a viable alternative in year 5, the variable costs need to be less than or equal to $15.89 per unit produced.

Conclusion The calculations demonstrate that the lower technology option would be a better path to follow at first but as time and production levels increase, the costs for using lower technology would begin to increase as compared to the higher technology alternative. But, this also shows that there is a window of opportunity as far as when to begin the transition from lower to higher technology. In order to recoup costs incurred with moving to a new facility in another country, the lower technology method would allow for short term lower costs. This gives time for the selection of newer technology equipment and how it will be phased into the manufacturing process along with examining any other factors that may apply before the actual transition to newer technology that is centrally located is implemented. The timeframe would be after year 5 and before year 10 which is where the shift occurs in the overall cost comparison.

Total Costs 8 References CTUO (2011).Scenario. Colorado Springs, CO: CTU Online. CTU Online, Virtual Campus, MGMT640-1102B-01.Retrieved May25, 2011 from https://campus.ctuonline.edu/pages/MainFrame.aspx?ContentFrame=/Home/Pages/Default.a spx. Brown, G. (n.d.) Introduction tocostsaccounting:Methods and Techniques. Retrieved May 25, 2011 from http://www.globusz.com/ebooks/Costing/00000011.htm Nurre, R. (n.d.) Process costing. Retrieved May 25, 2011 from http://www.smccd.net/accounts/nurre/online/chtr6mowen.html