- 8 Marks
MA – L2 – Q55 – Decision making techniques
Question
Harmony Company Ltd is preparing for next season’s operations. The company has provided the following information relating to its three products:
| TA | GB | DC | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Selling price | 18.5 | 16.2 | 12.6 |
| Material cost | 8.75 | 10.5 | 3.5 |
| Labour cost | 7.7 | 4.4 | 7.7 |
Labour hours per unit:
| TA | GB | DC | |
|---|---|---|---|
| Labour hours | 3.5 | 2.0 | 3.5 |
Annual Demand:
2,150 units (TA), 3,235 units (GB), 1,556 units (DC)
The company can only make available a total of 18,560 hours in the short run.
Required:
(a) Provide the optimal production plan for Harmony Ltd for the ensuing period.
(b) What is the total incremental benefit of producing DC instead of GB, assuming available resources can only meet demand of DC?
Answer
(a) Labour hours required to meet demand:
TA (2,150 units × 3.5 hours) = 7,525 h
GB (3,235 units × 2.0 hours) = 6,470 h
DC (1,556 units × 3.5 hours) = 5,446 h
Total = 19,441 hours
Shortage in Labour = Available labour hours – required labour hours
= 18,560 hours – 19,441 hours = 881 hours
Calculation of contribution per labour hour:
| TA | GB | DC | |
|---|---|---|---|
| Selling Price | 18.5 | 16.2 | 12.6 |
| Material Cost | 8.75 | 10.5 | 3.5 |
| Labour cost | 7.7 | 4.4 | 7.7 |
| Contribution per unit | 2.05 | 1.3 | 1.4 |
| Hours used | 3.5 | 2.0 | 3.5 |
| Contribution per labour hour | 0.59 | 0.65 | 0.40 |
| Ranking | 2 | 1 | 3 |
Resource allocation:
GB (3,235 units × 2.0 hours) = 6,470
TA (2,150 units × 3.5 hours) = 7,525
DC (1,304.29 units × 3.5 hours) = 4,565
Total = 18,560
(b) Total Incremental benefits of DC over GB:
Contribution of DC = 1.40
Contribution of GB = 1.30
Incremental benefit per unit = 0.10
Total (0.10 × 1,556 units) = GH¢155.6
- Topic: Decision making techniques
- Uploader: Salamat Hamid