- 15 Marks
MA – L2 – Q47 – Decision Making Techniques
Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.
Question
An engineering company has been experiencing problems with restricted availability of resources. The company manufactures a variety of casings. It makes four types of casing. Each casing requires the same bought-in component and some high-grade steel. The standard costs for the four types of casing are as follows:
| Casing | A | B | C | D |
|---|---|---|---|---|
| GH₵ | GH₵ | GH₵ | GH₵ | |
| Steel | 250 | 500 | 190 | 390 |
| Bought-in component | 50 | 50 | 50 | 50 |
| Direct labour | 60 | 60 | 50 | 100 |
| Variable production costs | 40 | 50 | 40 | 50 |
| Fixed production costs | 180 | 240 | 150 | 270 |
| Selling and administration costs | 145 | 225 | 120 | 215 |
| Profit | 35 | 55 | 30 | 55 |
| Selling price | 760 | 1,180 | 630 | 1,130 |
All the selling and administration costs are fixed and the same single component is used for each of the four products. Direct labour is paid GH₵8 per standard hour and each member of the workforce is capable of producing any of the casings.
The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30 units of C, and 20 units of D for production and delivery in the next month. Senior management have agreed that this order should be treated as a priority order and that these casings must be manufactured and delivered to the customer next month. This is necessary to maintain the goodwill of the customer. It is estimated that this order represents 10% of the total demand next month for each type of casing.
The company operates a just-in-time system, and has no inventories of steel, components, or finished goods.
Required:
If the aim is to maximise profit for the month, establish the production and selling plan for the company next month in the following situation:
(a) Situation 1. Supplies of steel are limited to GH₵250,000.
(b) Situation 2. Only 400 bought-in components are available from suppliers.
(c) Situation 3. A labour dispute restricts available productive labour hours in the month to 2,125.
(d) Situation 4. A labour dispute restricts available productive labour hours in the month to 2,125; but the manufacture of any quantities of the four casings could be sub-contracted to an outside supplier. The cost of buying the casings externally would be GH₵475, GH₵705, GH₵380, and GH₵640 for Casing A, Casing B, Casing C, and Casing D respectively. In addition, it should be assumed that the major customer insists that its order is completed by the company itself and the manufacture should not be subcontracted.
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