Decision Making - Questions-DONE

8/4/2019 Decision Making - Questions-DONE

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F5 – Performance Management

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Decision making

Questions


Questions

• Dec 2007 Q4 (a)(b)

• June 2008 Q2 (a)(b) (c)


Dec 2007 Q4 (a)

Outline the financial and other factors that Sniff Coshould consider when making a further processingdecision




Answer

Following factors in any further processing decision

• Forecast sales level changes

• Incremental costs

• Incremental revenues

• Effect on customers

• Effect on reputation


Dec 2007 Q4 (b)

Standard perfume $39.98 per 100ml

Consider adding hormone

Market research cost $3,000

1000lt to be further processed (10% of production)

99% is dilued alcohol costing $20/lt

Balance is oil costing $18,00/lt

Labour for 1000lts is 200 hrs @ $15/hr


Dec 2007 Q4 (b)

200lt of the output will be for male customers

2lt of hormone costing $7,750 to be added

800lt will be for female customers with 8lt of hormoneadded costing $12,000/lt




Dec 2007 Q4 (b)

Supervisor paid $35,00pa to be spend 10% of time onnew products (50/50)

Additional 500hrs needed to work on male versionand 700hrs on female version.

Labour currently working at full capacity.

F O/H allocated @ $25 per lab hr


Dec 2007 Q4 (b)

Sales price for this one-off promotion are

• Male $75.00 per 100ml

• Female $59.50 per 100ml


Dec 2007 Q4 (b)

Required

Provide a separate assessment and conclusion forthe male and the female versions of the product




Answer

Calculate

• Additional revenue generated

Male & Female

• Additional costs incurred

Male & Female

If costs > revenue => do not produce

If costs < revnue => do produce


Answer

Additional/Incremental revenue

Male

Original 200lt @ $399.80 79,960

Update 200lt + 2lt hormone

= 202lt @ $750/lt 151,500

Increase in revenue 71,540


Answer

Additional/Incremental revenue

FemaleOriginal 800lt @ $399.80 319,840

Update 800lt + 8lt hormone

= 808lt @ $595/lt 480,760

Increase in revenue 160,920




Answer

Additional/Incremental costs

• To make the updated product we need to take labourfrom production

• Must calculate the contribution that will be lost bytaking labour from production of the original product


Answer

Contribution generated by original product (1000 litres)

Sales 1000 @ 399.80 399,800

Materials

Alcohol 990lt @ $20/lt (19,800)

Oil 10lt @ $18,000/lt (180,000)

Labour 2,000hr @ $15/hr (30,000)

Contribution 170,000

Contribution per hour potentially lost

170,000 / 2000 = $85/hr


Answer

Incremental costs – Male

Labour

500hrs @ $15 7500

500hrs @ $85 42500Hormone

2lt @ $7750/lt 15500

Supervisor 0

O/Hs 0

Reasearch 0

Incremenatl costs 65,500




Answer

Incremental costs – Female

Labour

700hrs @ $15 10500

700hrs @ $85 59500

Hormone

8lt @ $12000/lt 96000

Supervisor 0

O/Hs 0

Reasearch 0

Incremenatl costs 166,000


Answer

Incremental profit

Male Female

Incremental rev 71,540 160,920

Incremental cost (65,500) (166,000)

Net benefit 6,040 (5,080)


June 2008 Q2 (a)

Manufacture pool and snooker cues

Ash restricted to 5,400kg @ $40/kg

Labour limited to 12,000hrs @ $18/hr

Demand Price

Pool cues 15,000 $41

Snooker cues 12,000 $69




June 2008 Q2 (a)

Standard cost cardPool Snooker

Labour/cue 0.5hr 0.75

Ash/cue 270g 270g

Other variable costs $1.20 $4.70

Calculate contribution per cue


June 2008 Q2 (a) - answer

Contribution = Selling Price – Variable cost

Pool Snooker

Price 41.00 69.00

Lab @ $1/hr (9.00) (13.50)

Mat @ $40/g (10.80) (10.80)

Other (1.20) (4.70)

Contribution 20.00 40.00


June 2008 Q2 (b)

Determine the optimal production plan for a typicalperiod assuming that HC is seeking to maximisethecontribution earned.

You should use a linear programming graph, identifythe feasible region and the optimal point andaccurately calculate the maximum contribution thatcould be earned using whichever equations youneed




June 2008 Q2 (b) - answer

Step 1Assign symbols to unknown quantities.

Let pool cues = X

Let snooker cues = Y



Step 2 Express the constraints.

Materials (kg)

.27x + .27y <= 5,400

Labour (hrs)

.5x +.75y <= 12,000

Demand

x <= 15,000 y <= 12,000

Non-negativity

x >= 0 y>= 0



Step 3

Formulate the objective function.

Z = 20x + 40y





Step 4

Solve the equations - graph each constraint

.27x + .27y <= 5 ,400 .5x +.75y <= 12,000

x = 0 x= 0

.27y = 5400 .75y = 12000

y = 20,000 y = 16000

y = 0 y = 0

.27x = 5400 .5x = 12000

x = 20,000 x = 24000


June 2008 Q2 (b) - answer24

20

18 .27x + .27y <= 5,400

16

14

12

10 .5x +.75y <= 12,000

8

8 10 12 14 16 18 20 22 24



20

18 .27x + .27y <= 5,400

16

14

12

10 .5x +.75y <= 12,000

8

8 10 12 14 16 18 20 22 24





Draw the ISO contribution line

Z = 20x + 40y

20x + 40y = 320

x = 0 y = 0

40y = 320 20x = 320

y = 8 x = 16



20

18 .27x + .27y <= 5,400

16

14

12

10 .5x +.75y <= 12,000

8

8 10 12 14 16 18 20 22 24



20

18 .27x + .27y <= 5,400

16 Optimal point

14

12

10 .5x +.75y <= 12,000

8

8 10 12 14 16 18 20 22 24





Optimal point is intersection of

.5x +.75y <= 12,000 (labour)

y <= 12,000 (max demand)

Solve the equations



.5x +.75y <= 12,000 (1))

y <= 12,000 (2)

Replace y in (1) with 12,000

.5x + .75 (12000) = 12000

.5x = 3000

x = 6000



Optimal production mix is

6000 pool cues

12000 snooker cues

Contribution is

Z = 20x + 40y

= 20 (6000) + 40(12000)

= $600,000




June 2008 Q2 (c)

Some of the craftsmen have offered to work overtime,provided that they are paid double time for theextra hours overthe contracted 12,000 hours.

HC has estimated that up to 1,200 hours per periodcould be gained in this way

Explain the meaning of a shadow price (dual price)and calculate the shadow price of both the labour(craftsmen) and the materials (ash)


June 2008 Q2 (c) - answer

Shadow price is the additional value on having anaditional unit of a scarce resource available.

The value is usually the additional contributionearned. This si the maximum amount we would payfor having that additonal unit.

We have shown that material (ash) is not a limitingfactor in this problem so it has a zero shadow price


June 2008 Q2 (c) - answer24

20

18 .27x + .27y <= 5,400

16 Optimal point

14

12

10 .5x +.75y <= 12,000

8

8 10 12 14 16 18 20 22 24





Labour is limited so we can calculate a shadow price.

. 5x +.75y <= 12,001 ( 1))

y <= 12,000 (2)

Replace y in (1) with 12,000

.5x + .75 (12000) = 12001

.5x = 3001

x = 6002



Optimal production mix is

6002 pool cues

12000 snooker cues

Contribution is

Z = 20x + 40y

= 20 (6002) + 40(12000)

= $600,040



Original contribution – New contribution

= Shadow price

Original 600,000

New 600,040

Shadow price 40




End of question session

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Decision Making - Questions-DONE

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