Based on the Question 1, we have calculated the total cost of custom
shirts made every month.
Total Cost of custom shirt, = Direct Labour cost multiplied by no. units
produced. Ike’s plan = $$7.68 x 2000 = $15360.
Mike’s plan = $3.47 x 2000 = $6940. There is a Cost difference of $8420 cost which
favour Mike’s plan.
Production of regular shirts on the other hand are cheaper using Ike’s
process. $54,880 for Ike ($3.43 x 16000) but $55520 for Mike’s plan ($3.47 x
16000). But difference between the two is only $640 which is insignificant when
compared to cost difference in Custom shirts.
Hence Mike’s plan seems superior based on the cost incurred. This can be
attributed to increase in efficiency from 83% to 93.75% in Mike’s plan. Mike
has also increased labour efficiency by 7.31%.
Capacity in Ike’s custom shirts production line is under-utilized but he
over-utilizes capacity in his regular shirt production line which incurs
additional cost for Over Time.
Though we can achieve the production targets using both Ike’s and Mike’s
methods, Mike’s method seems preferable. Mike’s proposal can help Dwight
Collier’s organisation to produce custom shirts through more efficient process
which can in turn make lucrative profits for the company.