Case - PCB Electronics

PCB Electronics is a contract manufacturer of printed circuitboard assemblies that specializes in manufacturing and testengineering support of complex printed circuit boards for companiesin the defense and medical instruments industries. The assemblyprocess begins with raw printed circuit boards, into whichpreprogrammed robotic machines insert various integrated circuitsand other components, and then these parts are soldered onto theboard. The board is then tested before shipment to thecustomer.

Four separate assembly lines, each with roughly the same type ofequipment, are used to assemble the circuit boards. Before runninga particular board assembly, the insertion equipment must be loadedwith the correct components, and the equipment programmed andtested before production begins. Setup time varies between 3 to 6hours depending on the complexity of the board being assembled.Setup labor costs PCB $40 per hour, and technicians assembling andtesting the completed boards cost $28 per hour. Not every assemblyline can manufacture every type of board. Some lines have olderinsertion and testing equipment inappropriate for more complexassemblies. The assignment of boards to assembly lines depends onthe number and complexity of the component insertions, the type ofsoldering to be applied, and the testing required.

Each assembly line has an hourly cost consisting of theaccounting depreciation on the equipment (straight line) andoccupancy costs (factory depreciation, taxes, insurance, andutilities). Occupancy costs are fixed with respect to volumechanges. Direct labor to set up and test the line as well as thedirect labor to manufacture the complete board assemblies and thetesting of each board is tracked separately to each batch ofboards. The following table summarizes the costs of operating eachline and the annual number of hours each line is expected to runassembling boards (excluding setup and testing time).

	Line I	Line II	Line III	Line IV
Equipment depreciation	$   840,000	$1,300,000	$480,000	$   950,000
Occupancy costs	213,000	261,000	189,000	237,000
Total annual line costs	$1,053,000	$1,561,000	$669,000	$1,187,000
Expected hours of operations	1,800	2,200	1,600	2,000

The equipment depreciation cost varies widely across the twolines because some of the lines (especially Line III) have oldermachines, some of which are fully depreciated.

Required:

Calculate the hourly cost of operating each of the fourlines. Line I:1,053,000/1,800=$585 Line II:1,561,000/2,200=$709.55 Line III:669,000/1,600=$418.13 Line IIII:1,187,000/2,000=$593.50 One of PCB’s customers, Healthtronics, has requested a specialorder for one of its boards PCB currently builds. Healthtronicsneeds 150 boards by next week. These boards have to be run on LineI because that is the only one with the specialized solderingcapability needed for these boards. Healthtronics will ship PCB theraw boards and components to be inserted, so PCB will not have tobuy any of the parts. Setup time is expected to be four hours, andrun time for these boards is expected to be 30 hours. Threetechnicians, each working 30 hours, are needed to staff Line Iwhile the Healthtronics boards are being assembled and tested.Healthtronics splits the production of this particular boardbetween PCB and another contract manufacturer. So, if PCB refusesthis special offer, the customer will take the work to the othermanufacturer. PCB does not expect refusing this order to adverselyaffect Healthtronics’ demand for future PCB work. If PCB acceptsthe special order, the line will be set up next Monday during theday. The job will start Monday afternoon and be finished byWednesday. Sixteen of the 30 hours of run time will be during anevening shift when the technicians are paid time and a half, or $42an hour ($28 × 1.5). Calculate the cost PCB will record as cost ofgoods sold when it ships the special order to Healthtronics. - Assume that accepting this special order from Healthtronicsdoes not adversely affect the delivery schedules of any of PCB’sother customers. What is PCB’s out-of-pocket cash flow of acceptingthis Healthtronics special order? Instead of assuming no other PCB customers’ deliveries areaffected by accepting the special order from Healthtronics as inpart (c), assume that another PCB customer, SonarTech,will be affected. SonarTech’s boards are currently running on LineI. They will have to be pulled from the line (two hours oftear-down time using setup technicians to unload the automaticparts feeders and return the parts to the storeroom), and Line Iwill have to be set up and tested as described in part(b). Healthtronics boards are run as in part (b).Then on Wednesday, six hours of setup time is needed to unload theremaining Healthtronics parts and reload and retest the SonarTechparts. To partially catch up on the SonarTech job, 14 hours of linerun time that would have been done during the day is shifted to theevening, when the four technicians needed to run the SonarTechboards are paid time and a half ($42 per hour). Instead of shippingall the SonarTech boards in one shipment, two overnight shipmentswill be made—the first occurring when the first half is produced,and the second batch when the order is completed, costing anadditional $2,300 of freight. SonarTech is willing to have itsboards delayed a few days, as long as it can receive the boards intwo overnight shipments. But SonarTech is unwilling to pay theadditional freight. What is the incremental cost of accepting theHealthtronics special order?