Unit 3: Albatross Anchor

Topics: Costs, Variable cost, Management accounting Pages: 5 (1472 words) Published: October 27, 2012
Question One
Based on the information presented in the scenario/case study discuss Albatross Anchor’s competitiveness in relation to (please address all items in the below list and provide support for your conclusions): 1. Cost

a) Cost of Production:
Cost of production is costs incurred by Albatross Anchor when manufacturing an anchor. There are two types of costs – fixed and variable. Variable costs depend on what materials and labor are needed to make the anchor and vary with the volume of anchors produced. Fixed costs, such as rent or utilities, are always constant no matter how many anchors are produced (Russell & Taylor, 2011, p. 230). Manufacturing costs are $8.00 per pound for the Albatross mushroom/bell anchor and $11.00 per pound for Albatross snag hook anchor. Albatross sells the anchors for the same price as competitors. However, Albatross can have a 35% less profit margin.

b) Economies of Scale in material purchasing:
A company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods (Hindle, 2008). As a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized (Heakal, 2009). There are two types of economies of scale – external and internal. External are economies that benefit a firm because of the way in which its industry is organized. Internal are cost savings that accrue to a firm regardless of the industry in which it operates (Hindle, 2008). Economies of scale give companies access to a larger market by allowing them to operate with better geographical reach.

If Albatross were to purchase materials in bulk it could save them money. However, since they make the anchors as orders are received, it would not be good economies of scale as the materials would sit in the warehouse causing higher production costs. c) Cost of Raw Materials Sitting Idle in the Warehouse:

Albatross only produces small batches of each anchor at a time. There is limited warehouse space for raw materials and finished goods which share a common space. Because of the small amount of space, Albatross would not benefit by having a lot of raw materials sitting idle in the warehouse. d) Cost of Finished Goods Sitting Idle in the Warehouse:

Again because of limited space, Albatross warehouse cannot hold much finished goods. A holding area of inventory on hand is reassuring but also costly. If Albatross holds a lot of items in inventory, they are dispensing a huge amount of cash needlessly. It would occupy space which could otherwise be devoted to operations. And the goods can become obsolete, especially when products are improved or changed. All of this represents financial loss to the business (Inventory Solutions Logistics Corp, 2007). 2. Speed of manufacturing process from order to finished product The goal of inventory control is to maintain a level of raw materials and finished products at the lowest cost possible. The level of inventory needed on hand by Albatross is dependent upon the speed of production, shelf life of goods, purchasing difficulty levels, costs and space considerations. The only item limiting Albatross from storing more finished product, which would speed up the lead time, is space. 3. Flexibility in filling order(s)

Albatross has a long process time of switching over from one manufacturing process to the other – 36 hours. If Albatross were able to maintain both process areas and not have to waste the labor and time for switching machinery, it would cut down on production costs which would help the profit margin. 4. Technology

Our case states that Albatross has plant antiquation. In part two of our proposal, we will look at two new different methods of manufacturing. 5. Capacity and facilities
The warehouse and administrative offices are in the same...
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