Operations Managment MGMT640 Individual Project

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Scenario: Smitheford Pharmaceuticals is facing other
issues. The company had not kept up with modern manufacturing
technology and was in the process of modernizing the injectable
manufacturing facilities in Pueblo and Colorado Springs. There were
several modernizing scenarios under analysis. Perform cost-benefit
analysis calculations for 2 equipment scenarios. The data are provided

Scheduling the various manufacturing operations has become more
complicated. In the 1990s, the Pueblo plant expanded tremendously, based
on forecasts for the growth of a promising osteoporosis medication,
Osto54. The facility doubled in size, mostly with tanks and processing
equipment. Osto54, however, caused heightened enzyme levels in the liver
and led to seven deaths in the elderly because of drug interactions.
Smitheford faced the loss of millions of dollars in liability suits and
had excess intermediate manufacturing capacity in Pueblo.

Two years ago, a new immune system treatment, Ultamyacin, was
discovered by a Smitheford researcher. The drug could be manufactured at
the Pueblo facility for the bulk manufacturing, but the final
manufacturing steps could be made in Puerto Rico for final purification
and then sent to Fort Collins for final manufacturing into sterile
bottles for injection.

Smitheford leadership has narrowed the decision making down to 2
options. The first is a higher technology option in one location, and
the other is a lower technology option in several locations.

High Technology
Centralized Location
Low Technology
Annual Fixed Cost $620,000 $110,000
Variable Cost/Product 16.31 18.89
Estimated Annual Production
(in number of products) Year 1 100,000 100,000
Year 5 170,000 170,000
Year 10 225,000 225,000

Use applicable business formulas to determine costs for both options.

Consider the following questions:

  • Which is the lead cost alternative in Years 1, 5, and 10?
  • How much would the variable cost per unit have to be in Year 5
    for the automated alternative to justify the additional annual fixed
    cost of the automated alternative over the manual alternative?
  • Determine what other factors should be considered when deciding the following:
    • When to centralize manufacturing
    • When to opt for higher technology options

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