Week 2 Hand-in Assignment

Week 2 Hand-in Assignment

Hype Ltd produces four types of clothes with the use of a special machine. Each labor hour in the special machine costs £10. For the production of the four products the company has 6,800 special machine labor hours. There will be no shortage of any other factor of production. Costings and break-even quantities for the products are as follows:

Products A (Jeans) B (Shirts) C (Jackets) D (Coats)
Material cost per unit £20 £30 £60 £100
Special machine labor hours per unit 0.25 0.5 0.4 0.55
Fixed costs £40,000 £50,000 £70,000 £120,000
BEP (break-even point) quantity 1,000 1,500 1,400 2,100

For each type of product the management of the firm aims at the following targeted profit levels:

Product Target Profit
A £100,000
B £120,000
C £150,000
D £200,000

However, the marketing department has conducted a consumer survey and estimated that the actual demand for the products will be different from that corresponding to the targeted profits. The estimated quantity demanded for each product is given in the table below:

Product Estimated Quantity Demanded
A 3,200
B 3,600
C 4,300
D 5,300

REQUIRED:

  1. Calculate the volume of activity that the company will have to achieve in order to meet the targeted level of profit for each one of the four products.
  2. Calculate the optimal production each of for the four products by taking into account the available labor hours and the estimates of the marketing department.
  3. Propose ways that could help the company to solve the problem of special machine time shortage (around 300 words).

Week 2 Hand-in Assignment

Introduction

It is important for every business organization such as Hyper Ltd to determine the volume of activities, which it requires to meet the expected profit. This helps it to achieve its objectives and ensures that it understands its production capacity. It is also necessary to compute optimal production, which ensures that the company maximizes its ability by neither producing excess output nor shortage outcomes (Lucas and Rafferty, 2008). It therefore ensures that all the output products, which are used effectively to enable this company, meet its desired objective because of achieving maximum utilization of the products.

Question 1

The volume of activity that this company requires to meet its target profit is computed using the following formula

Product A B C D
Material cost 20 30 60 100
Labor cost 2.5 5 4 5.5
Variable cost 22.5 35 64 105.5
Fixed cost 40,000 50,000 70,000 120,000
BEP 1000 1500 1400 2100
Unit Price 40,000/p-22.5 = 1000

p= 62.50

50,000/p-35 = 1500

p= 68.33

70,000/p-64 =1400

P= 164

120,000/p-105.5 = 2100

P = 162.64

Contribution (62.5-22.5 )= 40 (68.33-35)= 33.33 (164-64)=100 (162.64 – 105.5) =57.14
Required Profit 100,000 120,000 150,000 200000
The Volume of activities 140,000/40

3500 Units

170,000/33.3

5100units

220,000/100

2200 Units

320,000/57.14

5600Units

Question 2

Computation of Optimal Production

Planned Production time

Labor hours per unit 0.25 0.5 0.4 0.55
Planned production 3200 3600 4300 5300
Planned time 800 hours 1800hours 1720 hours 2915hours

Operating time

Labor hours per unit 0.25 0.5 0.4 0.55
Level of production 3500units 5100units 2200units 5600units
Operating time 875 hours 2550 hours 880hours 3080 hours
Availability 875/800 =1.1 2550/1800

=1.42

880/1720

=0.512

3080/2915

=1.06

Performance 3500/875/60

0.067

5100/2550/60

0.033

2200/880/60

0.0417

5600/3080/60

0.03030

Quantity 3500/3200

0.67

5100/3600

1.42

2200/4300

0.512

5600/5300

=1.057

OEE 1.1×0.67×0.67

=0.4938

49.38%

1.42×0.033×1.42

=0.0664

6.64%

0.512×0.0417×0.512

=0.1093

10.93%

1.06×0.03×1.057

0.0336

3.36%

Question 3

Proposed Solutions to the problem of special machine hour shortage

Improve Machinist Proficiencies

The use of the machines requires an adequate knowhow of the operators (Shim, 2000). This calls for the proper training of laborers to come up with operators well equipped with skills of operation that they will acquire from the training. This is a potential way of reducing the hours during which the machines take to produce a single unit of products. High level of employees’ efficiency also ensures that there is minimal machine breakdown since they understand the best way of using the machine (McLean, McGovern and Davie, 2015).

Reduce chances of machine breakdown

Special machine hour shortage can be resolved by mitigating the unnecessary machine breakdown, which would rather increase the number of hours used to produce a single unit of products. Maintaining the machines to operate throughout reduce the time wastage as well as maximizing a high production margin, which therefore works towards solving the special machine hour shortage (Shim, 2000). When a machine is not liable breakdown problems, there would be no time wasted to repair the mechanical problem, which would necessitate a low production and increases the production time. This is a strategy that helps solve the special machine hour shortage.

Increase Production capacity of the machine

Kim, & Kim (2013, pp. 565-568) states that it is necessary and important for the company in question to replace the old machines with low production capacity with a large one that is capable of producing large quantity of products per production run (Shim, 2000). This increases the output level within a comparatively shorter time. This therefore will ensure that the company solves its machine hour shortage problems.

Concluding Remarks

I therefore conclude that for effective maximization of profits, it is important for this company to determine its level of output, optimal production capacity so that it reduces unnecessary overproduction. The machine hour shortage can also be resolved by taking the above course of action mentioned earlier.

References

Shim, J., & Siegel, J. (2000). Modern cost management & analysis (2nd ed.). Hauppauge, N.Y.:Barron’s Educational Series.

Kim, S., and Kim, J. (2013). Financial Projection of the Nursing Fee Differentiation Policy Improvement Proposal in the National Health Insurance: Using a Break-even Analysis Model for the Optimal Nursing Fee. J Korean Acad Nurs Adm, 19(5), 565.

Lucas, M. and Rafferty, J. (2008). Cost analysis for pricing: Exploring the gap between theory and practice. The British Accounting Review, 40(2), pp.148-160.

McLean, T., McGovern, T. and Davie, S. (2015). Management accounting, engineering and the management of company growth: Clarke Chapman, 1864–1914. The British Accounting Review, 47(2), pp.177-190.

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