- 15 Marks
MA – L2 – Q48 – Decision Making Techniques
Question
Blue Horizon Industries Limited (BHIL) produces and markets three products viz. Alpha, Beta, and Gamma. Following information is available from BHIL’s records for the manufacture of each unit of these products:
| Alpha | Beta | Gamma | |
|---|---|---|---|
| Selling price | GH₵ 66 | GH₵ 106 | GH₵ 124 |
| Material-A (GH₵ 4 per kg) | GH₵ 8 | GH₵ 12 | GH₵ 12 |
| Material-B (GH₵ 6 per kg) | GH₵ 12 | GH₵ 24 | GH₵ 24 |
| Direct labour (GH₵ 10 per hour) | GH₵ 25 | GH₵ 25 | GH₵ 30 |
| Variable overhead based on: | |||
| – Labour hours | GH₵ 1.8 | GH₵ 1.5 | GH₵ 1.8 |
| – Machine hours | GH₵ 1.4 | GH₵ 1.2 | GH₵ 1.2 |
| Total | GH₵ 3.2 | GH₵ 2.7 | GH₵ 3.0 |
| Other data: | |||
| Machine hours | 7 | 6 | 6 |
| Maximum demand per month (units) | 3,000 | 3,000 | 5,000 |
Additional information:
(i) BHIL is also engaged in the trading of a fourth product Zeta, which is very popular in the market and generates a positive contribution. BHIL currently purchases 600 units per month of Zeta from a supplier at a cost of GH₵ 40 per unit. In-house manufacture of Zeta would require: 2.5 kg of material-B, 1 hour of direct labour, and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely to continue for the next 8 months.
(iii) BHIL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units of Beta, and 400 units of Gamma each month for the next 8 months. These quantities are in addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.
Required:
Determine whether BHIL should manufacture Zeta internally or continue to buy from the supplier during the next 8 months.
Answer
The resources required for the maximum demand must be compared with the resources available to determine whether either of the materials is a binding constraint.
Total quantity of each product to be manufactured:
| Government order | Market demand (Units) | Total | |
|---|---|---|---|
| Alpha | 200 | 900 | 1,100 |
| Beta | 300 | 3,000 | 3,300 |
| Gamma | 400 | 5,000 | 5,400 |
| Zeta | 0 | 600 | 600 |
All figures in kg:
| Resource | Available | Requirement | Alpha | Beta | Gamma | Zeta |
|---|---|---|---|---|---|---|
| Direct material-A | 22,000 | 18,400 | 2,200 | 0 | 16,200 | 0 |
| Direct material-B | 34,000 | 35,200 | 2,200 | 9,900 | 21,600 | 1,500 |
It can be seen from the above that the scarcity of material-B is a binding constraint and therefore the contributions of each product and the component per kg of material-B must be compared.
| Alpha | Beta | Gamma | Zeta | |
|---|---|---|---|---|
| Contribution | 17.9 | 36.8 | 42.3 | 14.0 |
| Contribution/kg of material-B | 8.95 | 12.27 | 10.58 | 5.60 |
| Rank | 3 | 1 | 2 | 4 |
BHIL should manufacture 120 units of Zeta and continue to purchase 480 units from the market.
Explanation:
- Contribution Calculations:
- Alpha: Selling price (GH₵ 66) – (Material-A: GH₵ 8 + Material-B: GH₵ 12 + Labour: GH₵ 25 + Variable overhead: GH₵ 3.2) = GH₵ 17.9
- Beta: Selling price (GH₵ 106) – (Material-A: GH₵ 12 + Material-B: GH₵ 24 + Labour: GH₵ 25 + Variable overhead: GH₵ 2.7) = GH₵ 36.8
- Gamma: Selling price (GH₵ 124) – (Material-A: GH₵ 12 + Material-B: GH₵ 24 + Labour: GH₵ 30 + Variable overhead: GH₵ 3.0) = GH₵ 42.3
- Zeta (in-house): Selling price (assume same as purchase price for contribution comparison, adjusted for costs) – (Material-B: 2.5 kg × GH₵ 6 = GH₵ 15 + Labour: 1 hr × GH₵ 10 = GH₵ 10 + Variable overhead: 1 hr × GH₵ 1.8 + 2 machine hrs × GH₵ 1.2 = GH₵ 4.2) = GH₵ 40 – GH₵ 29.2 = GH₵ 14.0
- Material-B Usage:
- Alpha: 1,100 units × 2 kg = 2,200 kg
- Beta: 3,300 units × 3 kg = 9,900 kg
- Gamma: 5,400 units × 4 kg = 21,600 kg
- Zeta: 600 units × 2.5 kg = 1,500 kg
- Total required: 35,200 kg vs. 34,000 kg available (shortage of 1,200 kg).
- Ranking: Beta (12.27), Gamma (10.58), Alpha (8.95), Zeta (5.60).
- Decision: Prioritize Beta, Gamma, and Alpha to meet government and market demand. For Zeta, manufacture 120 units (300 kg of material-B, within remaining 34,000 – 33,700 = 300 kg), and buy 480 units externally to minimize material-B usage due to low contribution per kg.
- Topic: Decision making techniques
- Uploader: Salamat Hamid