Additional Utilization cost of the integration production - struggling to understand method

Question

In this question, we are asked to calculate the total savings of the integrated production.

We are told that in the integrated production process, all machines except Harris Sunday press run at full capacity.

We are then told in the second step of the calculation that Harris Sunday Press has the remaining free capacity of the merged company. Then, we are told that the utilisation rate is 95% i.e. 25%+ from the original capacity.

I'm very confused here: I thought that post-integration, all machines except Harris Sunday (HS) are at 100% utilisation due to the additional 5.31 B we have onloaded from Tyrolia.

Unless I am mistaken, am I correct in saying that the remaining free capacity of the combined operation (= 5.76 - 5.31 = 0.45 B) is then attributed to the HS machine as per the question prompt?

Therefore, the total free capacity left over of the HS machine is 0.45 / 8.4 B (as per the full capacity of HS) to give 5% (approx.), which means that HS has increased utilisation from 70% to 95%, hence the additional cost is 20% x the original additional production time x hourly rate?

Answer 1

Dear,

Thank you for your question. I have reviewed the case and would like to clarify a few points to address your concerns.

In situations like this one, it is always beneficial and more straightforward to approach the problem differentially. In other words, you should compare a "base case" scenario (i.e., no merger) with a new scenario (i.e., merger) and assess the differential effects.

With that said, let's consider the data we have. In the base case scenario, the current production volume of Tyrolia Print is 5.31 billion pages per year (calculated based on the data available in the table). On the other hand, Paper Print has an unused capacity of 5.76 billion pages per year (as provided in the additional instructions). Therefore, if we were to transfer 100% of Tyrolia Print's production to Paper Print factories, Paper Print would still have 0.45 billion pages per year of unused capacity (all allocated to the Harry Sunday Press Machine, as per the instructions).

Now, let's calculate the cost. In the base case, maintaining operations at Tyrolia Print costs $6.035 million per year (calculated as Effective production time * Utilization * Hourly Rate).

In the new scenario, we need to calculate the additional costs that Paper Print will incur to accommodate the additional production resulting from the merger. We can determine these additional costs based on the increased utilization rate for each machine, as explained in detail in the case.

Finally, the difference between the base case the new scenario will provide clarity on whether it makes sense or not to pursue the merger (in this case “yes”, since additional costs in the new scenario are lower than the base case scenario)

I hope this clarifies the situation for you. Please do not hesitate to reach out if you still have any doubts or questions.

Best,

Antonio