- 30 Marks
Question
JJ Company specializes in the manufacture and distribution of accessories for cars and motorcycles across central Lagos and the suburbs. The board and management of the company have decided to expand their potential market by capitalizing on the recent demand for pedal cycles caused by congestion and concerns for global warming. They intend to start manufacturing pedal cycles from 2019.
The design team has developed four models A, B, C, and D for the initial launch of the pedal cycle. The manufacturing process involves frame manufacturing and assembly/accessory fitting.
Year 1
At present, there are 40 employees available to undertake frame manufacturing and 20 available for assembly and accessory fitting. Each employee works a 37-hour week, and no overtime is permitted. Employees working on frame manufacturing cost N1,100 per hour, while those working on assembly/accessory fitting cost N1,500 per hour. All employees can be fully utilized elsewhere if not working on this venture.
The anticipated time in hours that each process will take is as follows:
| Model | Frame Manufacturing (hours) | Assembly/Accessory Fitting (hours) |
|---|---|---|
| A | 2.25 | 1.25 |
| B | 2.20 | 1.80 |
| C | 2.20 | 1.40 |
| D | 2.60 | 3.00 |
Direct materials are expected to cost N5,500 for Model A, N6,000 for Models B and C, and N10,000 for Model D. There is no limit on the availability of materials.
Variable overheads of N2,700 per pedal cycle are incurred for both Models A and C, and N3,000 per pedal cycle for both Models B and D.
Fixed overheads allocated to the pedal cycle workshop are N666,000 per annum. The organization uses labor hours to base its overhead absorption rates.
Initial market research indicates that demand and selling prices are likely to be as follows:
| Model | Number of Pedal Cycles | Selling Price (N) |
|---|---|---|
| A | 200 | 14,550 |
| B | 75 | 16,500 |
| C | 220 | 17,000 |
| D | 80 | 24,000 |
Year 2
In Year 2, two additional options are available:
- Lifting the overtime ban and paying overtime at a rate of time and a half. This will necessitate raising the selling price of all units of the specific model being completed outside normal working hours by N2,500 per pedal cycle. The selling price of the other models remains the same as in Year 1.
- Buying in the completed pedal cycle necessary to meet demand from another supplier. This would cost N27,000 per pedal cycle, and the selling price of all units of the model would be increased by N5,500. However, the board is concerned this option may reduce demand.
Required:
a. Determine the production plan that would maximize the profit available to JJ Company in Year 1, assuming no overtime is worked. State the profit that would be earned as a result of this plan. (14 Marks)
b. Advise JJ Company of its most profitable course of action in Year 2, assuming all demand is to be satisfied. (8 Marks)
c. Explain in detail how the relationship between the company and the chosen supplier should be controlled if the directors are considering outsourcing key inputs. (8 Marks)
Answer
a. Production Plan for Year 1
Labor Constraints:
- Frame Manufacturing:
- 40 employees × 37 hours = 1,480 hours per week
- Assembly/Accessory Fitting:
- 20 employees × 37 hours = 740 hours per week
Total hours required:
- Frame Manufacturing = 450 + 165 + 484 + 208 = 1,307 hours
- Assembly/Accessory Fitting = 250 + 135 + 308 + 240 = 933 hours
Therefore, labour for the assembly and accessory fitting is a limiting factor, since the available
time is less than required time.
Contribution per hour of limiting factor
b) Option 1: Pay overtime to meet demand for Model D pedal cycles:
65 pedal cycles require 65 x 3 hours = 195 hours of assembly time
Option 2: Outsourcing
It would therefore be more profitable for the company to pay overtime.
c) In simple term, the relationship should be controlled through an enforceable contract. This should
include the following terms:
- Clear Contractual Agreements:
The foundation of the relationship should be a well-drafted contract that specifies key terms such as quality standards, delivery schedules, pricing, and penalties for non-compliance. The contract must also include clauses that protect the intellectual property and proprietary designs of JJ Company. - Supplier Performance Monitoring:
JJ Company should implement a system to monitor the supplier’s performance regularly. This can be done through key performance indicators (KPIs) like on-time delivery, defect rates, and adherence to specifications. Regular performance audits and reviews should be carried out to ensure continuous quality and reliability. - Communication and Collaboration:
Effective and open communication channels should be established between JJ Company and the supplier. This will foster collaboration, ensure quick problem-solving, and enable both parties to adapt to market changes. Periodic meetings or business reviews should be scheduled to discuss progress and address any issues that arise. - Risk Management:
JJ Company should have contingency plans in place to mitigate risks associated with outsourcing, such as supply chain disruptions or quality issues. Dual-sourcing or having backup suppliers could be considered. Additionally, risk-sharing mechanisms in the contract, such as financial penalties for late delivery, can help manage these risks. - Quality Control:
JJ Company should establish stringent quality control procedures. This can include inspections at the supplier’s facilities, as well as upon receipt of the goods. Continuous feedback on quality issues should be shared with the supplier, and corrective action plans should be agreed upon and monitored. - Ethical and Sustainability Compliance:
JJ Company should ensure that the supplier complies with ethical practices and sustainability standards, especially if corporate social responsibility (CSR) is a priority for JJ Company. This could include ensuring fair labor practices, minimizing environmental impact, and meeting any legal requirements. - Flexibility and Scalability:
As demand for JJ Company’s products may fluctuate, the relationship should allow for some level of flexibility in terms of production volumes and delivery schedules. Contracts should include provisions for scaling production up or down based on market demand, without compromising quality or timelines. - Long-term Relationship Building:
Developing a long-term partnership with the supplier could be beneficial. This involves building trust, investing in supplier development (if necessary), and ensuring both parties are aligned on long-term business goals. Strategic partnerships can lead to innovation, cost reductions, and competitive advantages.
- Tags: Costing, Labour Hours, Outsourcing, Overtime, Production planning, Profit Maximization
- Level: Level 2
- Topic: Decision-making techniques
- Series: NOV 2018
- Uploader: Kwame Aikins