THEUNIVERSITYOFNEWSOUTHWALES

SCHOOLOFMECHANICALANDMANUFACTURING
ENGINEERING

SULLIVANSFLOORINGCONCEPT
FINALREPORT

BachelorofMechanicalEngineering
June2013

Group16
ChuanQinz3326752
HaipengLuz3328225
SichunZhouz3325210
VincentLimz3309837
YanWangz3326641
XiaomengXiez3267281

Abstract
In management of engineering projects and business, it is vital to know the appropriate
tools to make the best decisions in choosing strategies. A case study for a flooring side
venture owned by one Norman Sullivan was given. Norman Sullivan had came up with a
new flooring concept which processes pinewood to duplicate the look of hardwood and
with other techniques created an unique, rustic look at an affordable price. Increase in
demand for this concept led Norman Sullivan to re-evaluate his current process and
consider strategies to improve his process; the hiring of additional labor and the purchase
of a router.
An analysis of cost was performed to help make the decision regarding the choice of
strategy. Following that, an analysis from a short term perspective with Present Worth
and Rate of Return was performed. An analysis for a long term perspective consisting of
breakeven analysis and Present Worth analysis with consideration of tax and inflation was
also performed. The results of these analyses led to the same conclusion; that the hire of 2
labors is the best strategy.

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Table of Contents
1. INTRODUCTION..........................................................................4
2. SULLIVANS BUSINESS................................................................5
2.1 KEY FACTORS OF SUCCESS............................................................................5
2.2 STRENGTHS................................................................................................ 6
2.3 RISKS........................................................................................................ 6
2.4 OPPORTUNITIES........................................................................................... 7
3. ISSUE ANALYSIS.........................................................................9
4. HYPOTHESIS............................................................................13
5. MACHINE COST........................................................................13
6. OTHER COSTS..........................................................................16
7. COST MODEL............................................................................18
7.1 SHORT TERM ANALYSIS...............................................................................18
7.1.1 Time Consumption..........................................................................18
7.1.2 ROR Analysis.................................................................................. 20
7.1.3 Present Worth Analysis...................................................................25
7.2LONG TERM ANALYSIS..................................................................................27
7.2.1 Breakeven Analysis........................................................................27
7.2.2 Long Term Cost Models...................................................................30
MACHINE ROR................................................................................................ 33
8. DISCUSSION.............................................................................34
9. CONCLUSION............................................................................35
10. REFERENCE............................................................................36

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1. Introduction
A study was conducted for Norman Sullivan, a carpenter based in London, Ontario.
Norman Sullivan had in the spring of 2007 been posed with decisions regarding the
future of his new custom wood-flooring concept. At that time, Sullivans wood flooring
business is a side venture, which allows him to work full time as a carpenter at Southwestern Ontario. Sullivan had acquired his skills in carpentry from working under
experienced and skilled tradespeople and as of the spring of 2007, had acquired eight
years of experience in construction.
Sullivans new concept started from a construction of a friends guest cabin. To duplicate
the hardwood, rustic look which his friend wanted but was too costly to justify, Sullivan
laid 12 inch wide pine planks, stained and finished it to have a similar appearance to
hardwood. Another distinctive feature is his installation method which consists of
securing the planks to the sub floor with several rows of screws visible on the board. To
contribute to the desired rustic look, doweling was done where the steel screw heads are
hidden by filling each screw hole with round wooden plugs, sanded to floor level. This
concept was warmly received by his friend and spread by word of mouth. $6 per square
foot was charged and earning margins are about 50 percent. Four and a half hours per
week are dedicated to board manufacturing while installation is primarily done on
weekends. 15 flooring jobs are projected for the coming year with an estimated 1 200
manufactured pine planks required.
Sullivans process in the manufacture of his floorboards is given in the flow chart below.

Plank
Planing CutTrimming
and Joint Construction
Drill screw Sand
& dowel
+ Inspect+
holes
Final Modification
5min

1min

mins

4min

4min

1min

Figure 1. Flow Chart

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The joint creation in the manufacture is one that Sullivan seeks to improve. In addition to
being time consuming, it also required multiple adjustments for consistency and is prone
to error. Thus to improve quality and maintain consistent production, Sullivan is
considering the purchase of a router and the hiring of extra help. An economic analysis
will be conducted to derive the best combination of strategies that Sullivan could
implement.

2. Sullivans Business
Sullivans flooring business is a product based and service based type of industry. The
floor boards are self manufactured, thus a product was made for sale and as Sullivan will
assemble floors for the customers, there is also a service component. The nature of the
industry requires competitive edge in terms of product and customer satisfaction.

2.1 Key Factors of Success

As in accordance with Sullivans business, unique design, competitive prices and
customer satisfaction have been identified as three Key Factors of Success for the
flooring business. Unique design can be considered as customized floors are an essential
component of the market. Sullivans uncommon use of pinewood gave a natural look for
the flooring which in tandem to the doweling method that Sullivan used gave a more
rustic look which led to Sullivans success in satisfying his friend, the customer. Price is
also a significant Key Factor of Success as the decision to use pinewood for his friend in
Sullivans case was because hardwood was too costly. Pinewood has significant
advantage of price. Hardwood floor costs up to 5 to 16 dollars per square foot, however,
pinewood only costs up to 6 dollars per square foot. The Final Key Factors of Success is
customer satisfaction. From Sullivans first success in customer satisfaction with this
friend, it started word of mouth referrals which led to rapid growth in his business. Thus,
key factors of success of Sullivans floor business are unique design, competitive price
and customer satisfaction.

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2.2 Strengths
Strengths of a business can be considered a business specific version of KFS. It is
important to evaluate strengths to compare with existing competitors. In Sullivans case,
strengths of his business could be seen in his product, customers, himself as an owner and
the company itself. First of all, the pine wood product that is currently the main product
of his business had a large profit margin. Through some research, an average of
approximately 40% (Albert D.B., 2007) profit margin for competing hard wood products
were found compared to the stated 50% margin for pine wood product. Secondly,
Sullivan has the access to a large amount of potential customers. Sullivan was employed
as a full time carpenter in a well-known design and renovation company therefore he
knew a few people who might interest in his design concept. Thirdly, Sullivan has a
strong professional background. His father and grandfather were also carpenters and
hence there is positive family influence on his business as it can help establish a
reputation for him. Some businesses with a craft lineage use this fact to make it their
selling point which Sullivan can also do. Moreover, he has a business degree and sale
experience which should benefit his flooring business. Fourthly, he has worked for highend project for wealthy family and professionals for many years. High end usually
suggests expensive products and good quality. Through this, consumers are more likely to
link him with high end and thus good quality even though his current product is of the
cheaper option. And finally, this is a self-owned company, which means that he has a lot
of freedom in making decisions.

2.3 Risks
The risks associated with the business owned by Norman Sullivan in this case study have
been identified as the following: undecided customers, lack of competition prevention,
quality variability, reliance on word of mouth advertising and risk of missed deadlines.
Undecided customers refer to the fact that in this market, customers do not exactly know

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what they want. Thus, there is no guarantee of stability for market share. This risk is
connected to the next risk; lack of prevention competition, in that Sullivan could not
prevent his rivals from copying his idea and getting a larger market share out of this
concept. As his business is of a part time nature, he could not get a large market share due
to labor and supply constraints and there is risk that full time competitors with larger
economies of scale and supply capabilities would take him out of the market. The next
risk is quality variability which is an explicitly stated risk given by the case study. This
risk amplifies the risks of the next issue; reliance on word of mouth advertising. If
Sullivans quality falls, his reliance on word of mouth advertising which he could not
control could make him lose a large part of his market share out of negative word of
mouth advertising from customer dissatisfaction. Even without considering the
consequences of quality variability, his reliance on word of mouth could also lead him to
lose market share to future competitors who resort to standard method of advertising such
as internet and newspaper advertising. Finally, the risk of missed deadlines results from
his current one man labour process and also the time variability of his process. If
anything befalls on Sullivan, no labour would be done and the progress of a project
would completely stop. This might lead to missed promised deadlines with customers and
possibly lead to customer dissatisfaction, an important key factor of success.

2.4 Opportunities
Opportunity is defined as the possible external advantages that a company can use to
achieve success. In this business case study, the opportunities are considered based on
two categories; manufacturing products, and further investigations. From the case study,
two possible ways to solve this problem has been presented; purchasing new equipment
and/or hiring additional labors.
Purchasing a machine will improve the production efficiency whilst also improving the
quality. Extra labor hire can improve manufacturing efficiency but not quality, since
although the pieces are easier to handle by more people, the handmade process still has
the same capacity of product quality.

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New construction procedures that can save manufacturing time while improving quality
can also be developed. Because the property of the material as softwood is less durable
than hardwood, the quality of the product needs to be enhanced. This can be achieved by
either improving the manufacturing process as presented before or searching for raw
material suppliers who would provide better quality products while maintaining lower or
equal price.
For a formal company, providing after sales service is an indispensable item. Proper
service can give customer feedback and enhance customer loyalty and if Sullivan has yet
to implement this, it would be a good opportunity. After Sales service can also bring extra
benefits by providing extra income from maintenance service and selling and advertising
of new products from this maintenance of relations.
There are also market share expansion opportunities that can be adopted. Sullivan has yet
to employ marketing, where marketing is a common way to publicize company business.
Advertising on newspaper, brochures, or website are several general ways for doing
marketing he could employ. Additionally, building a company website is a better way to
introduce the companys concept but may not be suitable to propagate recognition.
Establishing a brand is another option Sullivan could adopt for his business when it has
certain customer base or consistent production line which can ensure the production rate.
In addition, market survey may also be a good option to find out the customers needs and
find potential customers at the same time.
To increase revenue and profit, establishing a side business is a great option for gaining
profit from each step of his process. Among the opportunities he can exploit are; selling
raw material to individuals, providing only manufacturing process or installation service
and offering training for people who want to learn about softwood flooring.
Furthermore, Sullivan can seek collaboration with other investors. Partnering can be a
method to supplement lack resources from each other. This additional access of resources
can be in terms of both financial and technical areas. As more investors join in, the more
resources and the less risk the business will have. As a result, every investor would be
better off.
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3. Issue Analysis
IssueTree
Inconsistent Material
Supplies

Inconsiste
nt
Production

Unable to
Deal with
Increasing
Demand

Limited
Production
Capacity

Non-standardized
Manufacturing Process
Limited Working Time

Low Manufacturing Efficiency

Limited Workplace
Limited Storage Space

Average
Quality

Longer Installation Time

Waste of Time in Manufacturing
More Services Required after
Sale

Figure 2. Issue Tree

The major issue Sullivan is confronting is that he is unable to finish all the expected work
(i.e.15 projects) in the upcoming year. Instead of dividing this issue into whether he
should hire people or purchase equipment, there is a different approach to focus on three
other sub-issues: the inconsistent production, limited manufacturing productivity and
average quality. Therefore, the other changes that Sullivan can possibly make in the
future are also included beside purchasing a machine and hiring labor.

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The first sub-issue is the inconsistent production, which means Sullivan still has
troubles to keep current production going in smooth and steady state. Since pinewood is
not the primary choice for most wood board manufacturers, the material supply may
affect the production. Moreover, though the manufacturing process of Sullivan has been
confirmed, there are possibilities to improve it to optimize design, shorten the production
time and improve current quality.
The second sub-issue limited productivity is the most obvious one; the limited working
time and low manufacturing efficiency are the key components. Since this is only a side
venture, Sullivan has to do all the works himself without much help from a machine.
Moreover, there are two hidden issues, limited working and storage space, which are due
to the lack of a large workshop.
The last sub-issue; average quality is considered as a hidden issue. It is relevant to the
material and design concept, which can actually reduce the overall efficiency in three
phases: manufacturing, installation and after-sale. First of all, more floorboards need to
be produced since there will be some faulty boards; secondly, it takes longer to install the
floorboards when there are not consistency in dimensions; finally, the after-sale service
volume will increase.
In this report, expanding production and improving quality would be considered as the
major goals since they are more relevant to Sullivans current problem than the others. In
terms of increasing working time, hiring part-time labor would be a good option. On the
other hand, purchase of a machine would both increase manufacturing efficiency and
product quality.

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10

Table1: Issue Analysis Framework

As it has been illustrated in the previous part, this case includes three sub issues,
inconsistent production, average quality and limited production capacity.
To begin with, due to the increasing customer demand, Sullivan could gain larger market
share if the production is consistent. By investigation of the production line, the
manufacturing process could be modified. Customer survey and interview are two
methods to conduct the market analysis. Therefore, the quantity and quality of the
product will be improved.
Additionally, as the quality of the product is improved, Sullivan will be more competitive
and establish a better reputation. The reliability will be improved by quality check. After
introducing cutting and drilling machines, several steps can be fulfilled by mechanism.
Through modifying the assembling process, like joint method, the appearance and
sturdiness can be developed.

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11

Moreover, due to the limitation of the production capacity, Sullivan can meet the
increasing demand and gain larger market share if he increases the production capacity.
The market analysis is carried out from the perception of customer and their feedback. By
hiring more labor and utilizing new production process, the production would be
expanded and capability would be boosted.
The analyses shown above include manufacturing process analysis, market analysis,
reliability analysis, technology trend analysis and process capability analysis. These
analyses may not be carried out at the same time. The manufacturing process analysis
needs to be done to increase the capability. Reliability guarantees the quality of the
products. After the improvement of production, the market analysis could be introduced
to expand the market and looking for potential customers. When Sullivan has enough
customers, new technology and process capability analysis would be conducted to
increase the capability again and, therefore, gain larger market share.

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12

4. Hypothesis
In our case study, two hypotheses would be considered. They are purchasing a router and
hiring part-time labor. Even a do nothing approach and performing both the purchase and
hiring would be discussed as well.
Moreover, hiring multiple workers would be considered rather than buying more than one
machine since the setup price of machine is much higher than labor cost.

5. Machine Cost
Machine Selection
Sullivan has a table saw already and he is looking for a suitable router to construct joints
for his pinewood boards. Figure 1 below shows the capability of the router and as can be
seen, Sullivans task shown in exhibit 1would not be more complicated than the bottom
shapes. Thus a 3-axis machine would be more than enough.

Figure 3: 3-axis machine cut capability

Exhibit 1. Sullivans concept board

By considering Sullivan's workload, the CNC router type is chosen; CNC being an
abbreviation for Computer Numerical Control router. The price of a low-end 3-axis CNC
router is about 4000 dollars as we can see from the bottom table .

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13

Table 2: CNC Router Price (CNC Router Resource, 2013)

CNC Router Price range

Axes

Comments

Lower than $4000*

Hobby CNC router

$4000-$25,000

Low end CNC router: limited in size and

$25,000-$50,000

3 or 4

materials
Middle-Range CNC router: signage and panel

$50,000-$100,000

4 or 5

work
High end CNC router: wide variety of uses

More than $100,000

4 or 5

Highest

end

CNC

router:

Heavy-duty

machinery use

Finally, a multiple function CNC wood routers from Jinan Huawei CNC Router company
(Alibaba, 2013)is selected, shown in the table below. The purchase cost is $5000.
Maintenance and repair fee is approximately $600 per year and the electricity cost is $52
per year based on its power rating and London Electricity rate.

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14

Table 3. Jinan Huawei CNC Router Specifications

Voltage

380V

Power(W)

5kw

Weight

1700kg

Working
area

1300*2500mm

1.
Table 4: Machine Price and Costs
Estimated Cost

Actual Cost

The router

$4000

$5000

Maintenance and repair

$800 per year

$600 per year

Electricity

$400 per year

$ 52 per year

The outcomes of the machine are similar to Sullivan's expectations, which has been list in
the table below. With better board quality, the installation time is halved and there will be
no faulty boards and the manufacturing time is reduced into 11 minutes per board.
Finally, because of the machine can create more unique looks for the floor board, there is
a possibility that the potential customer number will increase.

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15

Table 5: Machine Outcomes

Installation
time

50% faster than

before

Manufacturing
time

Reduce to 11 min per board (originally

15minutes)

Improving
quality

No faulty board in manufacturing

(originally 2% defect rate)

Design
flexibility

Potential customer number increase from

more design capability
Increase in price for unique look

6. Other Costs
Some basic information regarding the costs needs to be clarified. Firstly, the electricity
fee was derived from the official website of London Ontario Electricity Rate Canada. We
can see from Table 6, London Ontario, Electricity Rate that mid-peak which is 7 am to 11
am and 5 pm to 7 pm of weekdays, costs 10.4 cents per kWh, and off-peak which is after
7pm of weekdays and weekends, costs 6.7 cents (Ontario Energy Board, 2013) Since
Sullivan has full time job and can only work 4.5 hours per week, therefore, it is assumed
that he does his flooring business half time on mid-peak period and half time on off-peak

period. Thus, an average the electricity fee

6.7 +10.4
=8.55 cents
2

per kWh was done.

Secondly, it was found from that gas price is $4.5/gallon which is $1.2/L in Canada
(Alter, 2012). We assume Sullivan has a Ford 4.0 car, it used 12L of gasoline every
100km (US Department of Energy, 2013). It can be calculated that for every 100 km,
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16

Sullivans car costs $14.27 for gasoline. For each customer, we assume Sullivan needs to
go to their house twice which means two return travels, the first round is for measuring
and surveying of the house, the second round is for assembling the floor. Moreover, an
approximate single travel distance of 50km was assumed. Thus, the distance Sullivan
needs to travel for each project can be calculated as 50km X 4. Therefore, the gasoline
cost is 50km X 4 X b X $14.27/100km X100 where b is the number of projects. In
addition, a rate of defect for Sullivan in his floor board manufacture is 2%, a normal
persons rate of defect is approximately 5% as a rule of thumb (Wallender, 2013), as
Sullivan is an experienced carpenter, an assumed half the rate of defect is deemed
reasonable. All the basic information is shown below in Table 7 (Miscellaneous
Background Information)

Moreover, labor cost is considered as $2 /hour for 4.5 hours per week as Sullivan
estimated in the given case study. This can be concluded as $100 per week per labor.
Sullivans business satisfied all regulations of The Ontario Employment Standards Act,
such as the minimum wage of $10.25 per hour per labor where Sullivans labor cost is
higher than this (Ontario Ministry of Labour, 2013). In addition, the weekly work hours
limit is 48 hours and Sullivans labor only works 4.5 hours per week, with rest periods
considered into it. Finally, revenue of each plank equals to $61.08. Since we know from
the case study that each plank size is 10ft X 12 inch convert into cm is 300.48 cm X
30.48 cm = 0.916 meter square. It is known that each plank has size of 1 foot square,
Sullivan has $6 profit. Therefore, we can conclude that each plank has revenue
2

0.916 m
$6
2 =$ 61.08
2
2
0.09m /ft
ft

Table 6. London Ontario, Electricity rate (Ontario Energy Board,

2013)
Period
On Peak

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Time
Weekdays:11 AM to
5PM

Rate
12.4cents per kWh

17

Mid Peak

Off peak

Weekdays: 7 AM to
11 AM and 5 PM to 7
PM
Weekdays: 7 PM to 7
AM
Weekends and
Holidays 24 HOURS

10.4 cents per kWh

6.7 cents per kWh

Table 7. Miscellaneous Background Information

Electricity
Gasoline
Revenue
Failure rate

$8.55 cents/kWh
$28.54/project
$61.08/plank
2%

7. Cost Model
Having established the costs of various aspects of the business, a cost model can now be
developed. The analysis is differentiated into two perspectives; one for the short term and
another in terms of long term. In this case, short term is taken to be in the coming year
while a study period of five years was taken for the long term analysis.

7.1 Short Term Analysis

7.1.1 Time Consumption
The short-term analysis for different alternatives depends on the time required to
accomplish the 15 projects. The average manufacturing time per piece decides the total
time needed. Therefore, the manufacturing steps for all alternatives are distributed by
line-balancing method. The original time for each step, when Sullivan is the only
operator, according to the case study is presented below:

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18

Plank
Planing CutTrimming
and Joint Construction
Drill screw Sand
& dowel
+ Inspect+
holes
Final Modification
5min

1min

mins

4min

4min

1min

Figure 4. Flow Chart

In allocation of labor, the more tricky steps such as trimming and joint constructions that
require more technical skills are assigned to Sullivan since he is more experienced and
would not make errors. For ease of analysis, the manufacturing time for other laborer(s)
matches the time the Sullivan needs for the process. For example, in alternative one and
two, Sullivan needs 9 and 5 minutes respectively to finish his part of job, the time for
other labour(s) used the same amount of time respectively so that the one piece can be
manufactured in 9 and 5 minutes correspondingly. The line-balancing for all the
alternatives is shown in table 8 (Manufacturing Steps and Time):
Table. 8: Manufacturing Steps and Time
Task

Task Time
(Labor)

Task Time
(Machine)

Task Description

Task That Must

Precede

A
B
C

5
1
4

N/A
N/A
3

A
B
C

Planning
Cutting Plank
Trimming and Joint
Construction
Drill screw & dowel
holes

N/A

D
E

Sand + Inspect+
Final Modification
Total

15 min

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11 min

19

A 5min

B 1min

C 4min

D 4min

E 1min

Figure. 5: Precedence diagram

Table. 9: Process Combination (Konnully, 2013 )
Stations

Task

Task Time (min)

Unassigned
Time

Cycle Time
(min)

0 idle

15

Do Nothing
Sullivan

A, B, C, D,
E

15

Alternative 1 (one labor)

9
0 idle
6
3 idle
Alternative 2 (two labor)
5
0 idle
5
0 idle
5
0 idle
Alternative 3 (one machine)
11
0 idle

Sullivan
Labor

C, D, E
A, B

Sullivan
Labor 1
Labor 2

B, C
A
D, E

Sullivan

A, B, C, D,
E
Alternative 4 (one labor & one machine)
B, C, D, E 6
0 idle
A
5
1 idle

Sullivan
Labor

9
5

11

7.1.2 ROR Analysis

Do Nothing
Based on the information provided by the case study background, the 15 projects require
approximately 1200 planks so the planks required per project should be 80 planks. The
manufacturing time per plank for the original plan is 15 min/plank so that the required
manufacturing time per project is 20 hours. Because Sullivan can only work 4.5 hours
each week outside of his full-time job working time, the time for each project to finish is
roughly 5 weeks. Each year has 52 week (including public holidays), as a result, the
maximum project number can be finished is 10. The calculations are considered as
consistently evenly distributed for the corresponding costs and revenues.

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20

80 piece / project

15
hour =20 hour 20 4.5 hour /week=4.44 week 5 week
60

52 week 5 week =10.4 projects 10 projects

Based on the manufacturing time per plank and the total projects can be finished in the
coming year, the revenue, costs of different aspects can be worked out.
Revenue per year =$ 61.08 / piece 80 piece 10 projects=$ 48864 / year
Revenue per month =Revenue per year 12=$ 48864 / ye ar 12=$ 4072/ month
The electricity cost for the original plan is the electricity consumption of the table saw
which has maximum power of 1800w. The operating time for the table saw during the
trimming procedure takes 4 minutes. Therefore, the corresponding monthly electricity
cost can be calculated.
Electricity cost =

Cost Elec=

10.34 Cen/kWh

1800 W 4
hr ( 80 10 ) 8.55Cen/kWh=$ 8.21 $ 0.68/month
1000
60

Based on previously stated assumptions in section 4 (Cost Background), the average

travel length for delivery/ measurement of each project is 50km and the fuel cost has
been presented as well. The monthly fuel cost can also be calculated as follows.
Fuel cost =

$ 14.27/100 km

km (total ) =10 4 50 km=2000 km/ year

C ost fuel =

$ 14.27 20000 km

=$ 285.4/ year $ 23.78 /month

100 km
100 km
Cost total/ month=Cost Elec + Cost fuel =$ 24.46 /month

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21

The assumed defect rated is 2%, the cost for that is:
Cost failitem =Fail items No . Cost per plank =2 ( 80 10 ) $ 30.54 per plank =$ 488.64
The total capital cost in this case is the material cost only which is:
C . Cost material =$ 30.54 / plank (80 10)=$ 24432
In the rate of return (ROR) analysis, the cost for electricity/fuel and the revenue are
counted as monthly, but the cost for fail item and purchase for material are counted as
capital cost. This gives the original plan the cash flow distribution diagram.

Figure 6 Cash Flow Diagram

The equation used for ROR analysis is:

0=PW D + PW R
PWD: present worth of costs or disbursements
PWR: present worth of incomes or receipts
Then the equation for DN alternative is listed as:

0=( C .Cost material +Cost fail item )Total Cost monthly ( P/ A , i , Period ( month )) + Revenue monthly ( P/ A , i , Period (m

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Other Alternatives
The calculations for other alternatives are done through the same procedures but depend
on various manufacturing time for each independent situations.
Table 10. Manufacturing Time

Time
Manufactur
ing
time/plank(
hr)

Time/proj
ect (hr)

Time/proj
ect
(week)

Number
of
Projects

Total
Manufactur
ing Time
(month)

Alternativ
e 1 (1
Extra
Labor)

9/60

12

15

11

Alternativ
e 2(2
Extra
Labor)

5/60

6.67

15

Alternativ
e 3 (1
Machine)

11/60

14.67

3.3

15

12

Alternativ
e 4 (1
Extra
Labor + 1
Machine)

6/60

1.78

15

The revenue for the four additional alternatives follows the same procedures as for the
DN. However, the salvage value of the machine needs to be considered after the period
finishing the projects. The salvage value depreciates at a rate of 25% in accordance to the
declining balance method. The equation used is:
Salvage=Capital Cost ( 1i )=$ 5652 (10.25 )=$ 4239

Table 11. Revenue and Salvage

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Revenue
Revenu
e/plank
($/piece
)

Number
of
Planks

Total
Revenu
e ($)

Time/proje
ct (month)

Monthly
Revenue
($/month
)

Salvag
e ($)

Alternative
1 (1 Extra
Labor)

61.08

1200

73296

11

6663.27

Alternative
2(2 Extra
Labor)

61.08

1200

73296

10470.86

Alternative
3(1
Machine)

61.08

1200

73296

12

6108.00

4239

Alternative
4 (1 Extra
Labor + 1
Machine)

61.08

1200

73296

10470.86

4239

For the cost section, the factors dependent on the number of project such as electricity
cost and fuel cost are solved based on finishing the anticipated 15 projects thus the total
costs for these two are the same for the additional alternatives, but the manufacturing
period and subsequently the monthly cost are different. The capital costs for alternatives
with machine contain the extra cost for the purchase of the machine.

Table 12. Costs

Cost
Electrici
ty Cost
($)

Group 16

Fuel
Cost
($)

Monthly
Labor
Cost
($/month

Time/p
roject
(mont
h)

Total
Monthly
Cost
($/mont

Capit
al
Cost
of

Capital
Cost of
Materi
al ($)

24

Fail
Item
Cost
($)

)
Alternativ
e1

12.312

428.1

Alternativ
e2

12.312

428.1

Alternativ
e3

12.312

428.1

Alternativ
e4

12.312

428.1

h)

420

11

840

Machi
ne ($)

460.04

902.92

12

36.70

420

482.92

5652
5652

36648

732.9
6

36648

732.9
6

36648

732.9
6

36648

732.9
6

The Equation used for solving ROR for these four additional alternatives is similar to the
one used for DN:

+C . Cost machine
C . Cost material +Cost fail item()Total Cost monthly ( P / A , i , Period ( month ) )+ Revenuemonthly ( P/ A , i , Period ( month )) (
0=

The cash flow distribution diagrams for the additional four alternatives are the same with
the one used in DN.
By substituting the corresponding values into the equation shown above for each case, the
ROR can be solved and presented in the table below:
Table 13. Short term ROR

ROR

Group 16

Do
Nothing

Alternativ
e 1 (1
Extra
Labor)

Alternativ
e 2 (2
Extra
Labor)

Alternativ
e 3 (1
Machine)

12.13%

11.66%

17.14%

9.20%

Alternativ
e 4 (1
Extra
Labor + 1
Machine)
13.85%

25

7.1.3 Present Worth Analysis

Present worth is the equivalent present value of the money that will be earned in the
future. It is essential to the cost model analysis it is because the alternative that has the
highest present value is has the great chance to be the best solution for this short-term
business analysis. The decisive strategy for the short term will be made based on results
of both Present Worth and ROR analysis.
The analysis for present worth for all the alternatives uses the same basic cash flow
distribution diagram presented in the ROR analysis section. An Excel command is used to
derive the Present Worth. The corresponding Excel equation/command used is:
CF
CF
PV =P+ NPV (i , year cell , last cell)
The i% is the effective interest. It is solved based on the assumption of the Minimum
Attractive Rate of Return (MARR) is 10%. Substituting and solving the equation for the
effective interest yields the following result:
m

Effective ,i=(1+

r
10
) 1= 1+
m
12

12

) 1=10.47

where, r is the MARR and m is the analyzing period. In this short-term analysis, the
frequency is set to be monthly so m is 12 as there is 12 month in a year. Therefore, the
effective interest rate is 10.47%.
The data for all options has been calculated and presented in the ROR section as well.
Therefore, by applying the command for each case, the results of present values are
shown in the table below:
Table 14. Short Term Present Worth for Different Strategies
Strategy

Group 16

Do Nothing

Alternative
1 (1 Extra
Labor)

Alternative
2 (2 Extra
Labor)

Alternative
3 (1
Machine)

Alternative
4 (1 Extra
Labor + 1
Machine)

26

PW ($)

2658.05

2909.39

9199.77

-314.31

7767.79

In the short-term analysis, the cost of company permit fee, tax, and inflation are not
considered. The machine requires maintenance every one year, and since the maximum
manufacturing period among all the alternatives is one year, the maintenance fee for the
machine is not counted either. Furthermore, the assumptions of providing consistent
production and evenly distributed tasks per month are made during analysis.
Observing the result data in ROR analysis and present value analysis, alternative 2 (hiring
two extra labours) has the highest result in both of the sections. This is due to the high
production efficiency that takes the shortest manufacturing time per plank (5min/plank),
and it takes the shortest manufacturing period for accomplishing the 15 projects. In
addition, for short-term analysis with certain project numbers, the options with less fixed
cost bring more profits. Since the options with purchasing new machine require much
higher set-up costs, these options are not recommended. In conclusion, because hiring
two labours has the highest values in both ROR and present value, it is the best option for
Sullivan for finishing the anticipated 15 projects in the coming year.

Group 16

27

7.2Long Term Analysis

Table 15. Costs of Strategies with Long Term Considerations

Cost($)

Variable
Cost

Capacity
Cost
Total
Revenue

Alternatives
Set Up Cost ($)
Labor Cost ($ per year )
Land Lease Cost ($ per year)
Maintenance Cost ($ per year)
Router Electricity Cost ($ per year)
Suggested Advertising Cost ($ per
year)
Insurance ($ per year)
Material Cost ($ per project,
$30.54 per board)
Permit Fee ($ total, $90 per
project)
Transport Cost ($ Total, Fuel Cost )
Waste Piece Cost ($ Total, 2
boards/project)
Project Capacity
Annual Operating Cost Total
Total Revenue ($)

1
1
Machi
Machin 1
ne + 1 2
e
Labor
Labor
Labor
-5000
0
-5000
0
0
-2600
-2600
-5200
7920
7920
7920
7920
600
0
600
0
52
0
52
0
500
90
36648

500
90
46420.
8

500
90
70852.
8

500
90
83068.
8

1350
428.1

1710
542.26

2610
827.66

3060
970.36

61.08
19
54682.
14
92841.
6

0
61.08
29
34
75910. 90538.
46
24
14170 166137
5.6
.6

15
47618.1
73296

The cost of each strategy from a long perspective is given in the table above. Similar to
the short term analysis, some costs are at the same rate such as the material cost, utility,
transport, labor, maintenance and waste piece cost. On the other hand new costs
considered include land lease (Loopnet , 2013), advertising and insurance (Ian W.
Wallace Ltd, 2013); fixed costs which are independent to project capacity. The newly
considered variable fee is permit fees derived from the Canadian Home Builders
Association, calculated by the projects capacity times the permit fee per project.

7.2.1 Breakeven Analysis

Group 16

28

For long-term analysis, as demand is changing constantly through time, it is important to

conduct analysis in consideration to this fluctuation of demand. Therefore, breakeven
analysis using annual worth (AW) method was carried out for this purpose.
AW values of each alternative were calculated referring to the above table. The following
equation applied in this analysis uses Excel.
AW=ABS (PMT (MARR, no of years, Setup cost, Salvage value)- round(time to finish one
job)*labor rate*labor number- material cost- electricity cost- patrol cost- building
permit cost- land lease cost- advertisement cost- insurance cost- machine maintenance
and electricity cost)
The graph below illustrates the total AW of each alterative verse the number of jobs per
year. The maximum capacity of each alternative was taken into considered. AW values
were converted to positive.

AW vs Quantity
120
100
80
1 labour
2 labour
AW, thousand dollar per year

160
machine

1 labour+ 1 machine

DN

40
20
0
0

10

15

20

25

30

35

40

Quantity, no. of jobs per year

Figure 7. Relationship between AW and quantity

However, as differences between the AW of each alternative are relative small compared
to total AW values, the intersection point of lines are not clear from the graph above. As a
result, all the common AW factors were eliminated. Only costs related to labor and

Group 16

29

machine were taken into account. The table below demonstrates the factors considered in
the long term analysis.

Table 16: AW factors related to labor and machine

1
machi
1 labor
2 labor
ne
Setup cost
0
0
5000
years
5
5
5
salvage
value(after 5
years)
0
0
1186
labor rate($/week)
100
100
0
output (week/job)
2.67
1.5
3.26
variable cost(total 2.67*x*1
1.5*x*10
labor cost)
00
0*2
0
machine
maintenance and
electricity cost
0
0
652
MARRafter tax
+ inflation
15.82
adjusted)
15.82%
15.82%
%
*x=quantity, number of jobs per year

1 labor+ 1
machine
5000
5

DN
0
5

1186
100
1.77

0
0
4.44

1.77*x*100

652

15.82%

15.82
%

Therefore, the equation applied was adjusted as followed.

AW=ABS (PMT (MARR, no of years, Setup cost, Salvage value) - round (time to finish
one job)*labor rate*labor number- machine maintenance and electricity cost)
The following figure shows the machine and labor AW factors using quantity as a
variable. As noticed that, the AW values were also converted to positive.

Group 16

30

AW(machine + labor) vs Quantity

16000
14000
12000
10000
8000
labour per year
2 labour
AW,1dollar
6000

1 machine

1 labour+ 1 machine

DN

4000
2000
0
0

10

15

20

25

30

35

40

quantity, no. of jobs per year

Figure 8. Relationship between AW(machine + labor) and quantity

Observing the points of intersection yields us the table below.

Table 17. Decision Table based on AW breakeven analysis

No. of Quantity, no. of jobs per year

r Alternative chosen

0-10

DN

11-15

1 Machine

16-20

1 Labor

20-29

1 Labor and 1 Machine

30 and above

2 Labor

It could be seen that the alternate of do nothing is suitable for the number of projects
below ten. If the number of project is between 11 and 15, one machine would be the best
option. For more than 30 projects, the alternative of two labors can meet the requirement.

Group 16

31

7.2.2 Long Term Cost Models

Present Worth with Tax Analysis
The first step in a tax analysis is to determine the CFBT i.e. Cash Blow Before Tax.
CFBT is given by the following equation.
CFBT = GI-E-P+S

GI = Gross Income
E = Expenses
P = First Cost
S = Salvage Value
Consequently following the equation, the cash flow within the next five years for all
strategies are derived and presented in the table below, table 17.

Table 18. Cash Flow Before Tax

Year
0
1
2
3
4
5

Machine
CFBT
-$5,000.00
$25,329.90
$25,329.90
$25,329.90
$25,329.90
$26,516.42

Machine &
1 Labour
Hire CFBT
-$5,000.00
$60,447.14
$60,447.14
$60,447.14
$60,447.14
$61,633.66

1 Labour Hire
CFBT
$0.00
$38,159.46
$38,159.46
$38,159.46
$38,159.46
$38,159.46

2 Labour Hire
CFBT
$0.00
$75,599.36
$75,599.36
$75,599.36
$75,599.36
$75,599.36

The Present Worth value is derived from the excel command

P + NPV(i%,year_1_CF_cell, last_year_CF_cell)

Applying this command to the CFBT yields the Present Worth values tabulated below.
Table 19. The Present Worth values

Strateg
y

Group 16

Machine
Purchase

Machine
Purchase and
Labour Hire

1 Labour Hire

2 Labour
Hire

32

PW, 5
years,
10%

$91,756.99

$224,878.96

$286,581
.05

$144,654.38

Research of Canadian tax rate has identified a federal tax rate of 15% and a state tax rate
of 5.05%. (Government of Canada, 2013) Following that, the effective tax rate identified
by the equation
Te = (S & L Rate) + (1- S & L Rate)*(Federal Rate)
(Voorthuysen, 2013 )
*Te = Effective Tax Rate
*S & L Rate = State and Local Rate

The equation gives us an effective tax rate of 12.475%. Depreciation in this case is
considered using the declining balance (DB) method at a rate of 25%. The Cash Flow
after Tax (CFAT) for every strategy had been put in the table 18 constructed from Excel.
The Cash Flow After Tax is given by the equation below:
CFAT = CFBT Ti (Te)
= GI E P S (GI - E- D) Te
(Voorthuysen, 2013 )

*D = Depreciation
Table 20. Cash Flow After Tax

Year
0
1
2
3
4
5

Group 16

Machine
CFAT
-$5,000.00
$22,325.93
$22,286.95
$22,257.71
$22,235.78
$23,257.84

Machine & 1
Labour Hire
1 Labour
CFA T
Hire CFAT
-$5,000.00
$0.00
$52,906.36 $33,399.07
$52,906.36 $33,399.07
$52,906.36 $33,399.07
$52,906.36 $33,399.07
$53,944.86 $33,399.07

2 Labour
Hire CFAT
$0.00
$66,168.34
$66,168.34
$66,168.34
$66,168.34
$66,168.34

33

An original Minimum Attractive Rate of Return (MARR) of 10% was assumed for
Sullivans strategies as the case study stated that he would be satisfied for 10% rate of
return from his machine. Taking into consideration of inflation, the adjusted MARR,
MARRf, given by
If = i + f + if (Voorthuysen, 2013 )
*if = MARRf
*i = real
*f = Inflation

became 15.825%, inflation and interest rate at Canada of 2007 being 3% and 3.5%
respectively (Trading Economics , 2013). After taking into consideration of this new
MARR and then calculating the PW for CFAT with the excel command below,
P + NPV(i%,year_1_CF_cell, last_year_CF_cell)

With i% being 15.825%, it yielded the Present Worth values given in Table 19.
Table 21. Present Worth After Consideration of Tax and Inflation

Strat
egy
PW

Machine
$68,725.08

Machine & 1
Labour
$169,438.69

2 Labour
1 Labour Hire
Hire
$109,806.28
$217,541.98

As one could observe from the table, the 2 additional labor hire has the most present
worth value, which is also the case for present worth before tax and inflation
considerations. With the tax analysis, it is observed that the effect of tax does not
significantly affect the choice of strategy, as there are very large differences in cash flows
for each strategy.

Machine ROR
Table 22. Machine Yearly Cash Flow and RoR
Ye
ar

Group 16

1 Machine
Cash Flow

34

0
1
2
3
4
5
Ro
R

-5000
25677.9
25677.9
25677.9
25677.9
25864.42
513.50%

In the case study, it was stated that a Rate of Return of 10% is acceptable to justify the
purchase of the machine. Calculating the yearly cash flow and using the IRR Excel
command to find the Rate of Return for the purchase of machine gives a rate of 513.5%
with just the purchase of one machine. However, additional hire of 2 labor gives better
results in terms of Present Worth and also without any set up costs, thus in preference to 2
labor hire strategy, machine will not be purchased. Going beyond the scope of the case
study, 2 labor hire in conjunction with purchase of the machine might give good results as
well.
To sum up, based on breakeven analysis, the alternative of two labors can better fulfill
more than 29 projects each year. If Sullivan has sufficient customers, the alternative of 2
labors would not only complete the tasks, but also has the highest present worth.
However, considering the situation that Sullivan has 15 projects in the coming year and
the number of customers reaches 29, which is nearly doubled at the 5th year, the
alternative of one machine and one labor would be the best option, for the cost is the
lowest while the present worth is still high.

8. Discussion
In conjunction with the earlier analysis with present worth, the decision of which strategy
to use can be determined. One problem in making a decision is the lack of information
regarding projection of future demand. The long term present worth analysis assumes that
demand fulfills each strategys project capacity; however there are many circumstances
Group 16

35

that might prevent this. The breakeven analysis was used to help in this problem, if
Sullivan gathered enough data to be able to accurately predict the number of jobs he
would have in year, he could use the breakeven analysis to choose which strategy is best
based on volume.
On the other hand, analysis from a short term and long term perspective has given the
conclusion that 2 labor hire theoretically gives the best benefit given the appropriate
conditions, as the most cash flow and value is generated. In addition to generating the
most cash flow, labor hire of this nature also offers flexibility. In the event that Sullivan
was wrong about his approximation of future potential jobs, the workers due to being
hired in casual basis can be put on leave until they are necessary. In addition, it allows
Sullivan the greatest amount of project capability and the ability to get the largest market
share with his new concept, thus eliminating an aforementioned risk of losing out in
market share. The hire of labor safely covers the risk of missed deadlines that was a
problem before as well. The only issue Sullivan might need to be careful is quality
control for his labor.

Group 16

36

9. Conclusion
In conclusion, without more accurate data on demand for Sullivans concept, the
additional hire of 2 labors is the strategy Sullivan should adopt. In addition to having
more worth in the short and long run, this strategy also gives him flexibility in cost
saving should his approximations of future customers fall short due to unforeseen
circumstances. With accurate data regarding the volume he would have each year or
limiting himself to a number of projects per year, he could refer to the breakeven analysis
table results which gives the best strategy worth depending on the volume of jobs per
year.

Group 16

37

10. Reference
Albert D. B. (2007). Steadily Improve Your Wood Flooring Business Over
Time. Retrieved 2013 from Hardwood Floors:
http://hardwoodfloorsmag.com/articles/article.aspx?articleid=176&zoneid=4.
Alibaba (2013). Multi Functions CNC Router. Retrieved 2013 from
Alibaba.com: http://jnhwcnc.en.alibaba.com/product/815161387215879358/Multi_Functions_CNC_Router_Engraving_Wood_and_Marble_Stone
_Machine.html
Alter, L. (2012). Gas Prices in Canada Hitting Record Highs, U$5.68 per Gallon
and they can't blame Obama. Retrieved 2013, from Tree Hugger:
http://www.treehugger.com/environmental-policy/gas-prices-canada-hittingrecord-highs-us-568-gallon-and-they-cant-blame-obama.html
Canada Interest Rate . (2013). From Trading Economics :
http://www.tradingeconomics.com/canada/interest-rate
Forintek Canada Corp. (2006). Wood Flooring. Retrieved 04 11, 2013, from
Solutions for Wood:
http://www.solutionsforwood.com/_docs/reports/Flooring_Sector.pdf
Government of Canada. (2013). Canada Revenue Agency. Retrieved 2013,
from What are the income tax rates in Canada for 2013?: http://www.craarc.gc.ca/tx/ndvdls/fq/txrts-eng.html
Ian W. Wallace Ltd. (2013). Craft Insurance . Retrieved from Craftsmen
Insurance : http://www.craftinsurance.co.uk/Company-profile/
Konnully, J. (2013). What is assembly line balancing? Retrieved 2013, from
Slide Share: http://www.slideshare.net/JosephKonnully/assembly-linebalancing
Loopnet . (2013). Ontario Industrial Properties For Lease. Retrieved from
Loopnet : http://www.loopnet.com/Intl/Canada/Ontario-Commercial-RealEstate/
Ontario Energy Board. (2013). Electricity Prices. Retrieved 2013, from Ontario
Energy Board:
http://www.ontarioenergyboard.ca/OEB/Consumers/Electricity/Electricity+Pric
es
Ontario Ministry of Labour. (2013). Employment Standards. Retrieved 05 11,
2013, from http://www.labour.gov.on.ca/english/es/

Group 16

38

Trading Economics . (2013). Canada Interest Rate . From Trading Economics :

http://www.tradingeconomics.com/canada/interest-rate
US Department of Energy. (2013). Fuel Economy of 2011 ranger. Retrieved
2013, from Fuel Economy:
http://www.fueleconomy.gov/feg/bymodel/2011_Ford_Ranger.shtml
Voorthuysen, E. V. (2013 ). Engineering Managment . Sydney : McGrawth Hill .
Wallender, L. (2013). How much hardwood flooring to order. Retrieved 2013,
from About.com: http://homerenovations.about.com/od/hardwoodfloor/a/HowMuch-Hardwood-Flooring-To-Order.htm

Group 16

39