A pump manufacturer improved its production operation over t

A pump manufacturer improved its production operation over the past 18 months, and a record of its performance improvement is shown in the table below.

Performance measure      Baseline   12 Months   18 months

Cycle time 18 weeks 6 weeks 1 week

Inventory turns 4 8 48

Scrrap (% of lot size) 13 % 5 % .06 %

First time good parts 45 % 85 % 93 %

Floor space 1,800 sqft 400 sqft 125 sqft

The cost of goods sold was $1.8 million, the lot size production was 200 parts, and the overhead floor space cost was %150 per square foot. Calculate the overhead cost savings as a result of the floor space reduction between the baseline and 18-month point in time. (Enter your answer as a number without the dollar $ sign.)

Solution

Overhead cost in the baseline = (cost per ft square)*(floor space in the baseline) = 150*1800 = $270000

Overhead cost after 18 months = (cost per ft square)*(floor space after 18 months) = 150*125 = $18750

Therefore, overhead cost savings = Overhead cost in the baseline - overhead cost after 18 months

Overhead cost savings = 270000 - 18750 = $251250