- 15 Marks
MA – L2 – Q48 – Decision Making Techniques
Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.
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.
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