Amity Business School KEY FACTORS Key factor is that factor which limits the volume of output or level of activities of An undertaking at a particular point of time or over a period.
The extent of its influence must be first assessed so as to maximise the profits. e.g. of key factors may be i. Shortage of raw material ii. Shortage of Labour hours iii. Machine capacity available iv. Sales capacity available
Basis of decision The product mix decision should be taken on the basis of contribution per unit of key factor i.e. contribution per unit key factor per unit Amity Business School Case 1 X ltd produces two products using the same raw material and production facilities, Following information is provided to you Product A Product B Rs Rs Selling price per unit 100 80 Material @ Rs 2 per Kg 20 10 Labour @ Rs 3 Per hr 15 30 Variable overheads @ Rs 4 per machine hr 40 16 Total fixed overheads: Rs 6,00,000 Comment on the profitability of each product when i. Raw material is in short supply ii. Labour hour are limited iii. Production capacity ( in term of machine hour ) is limited iv. There is heavy demand conditions v. There are low demand conditions Amity Business School Statement showing the contribution per unit of key factor Particulars product A product B Selling price per unit 100 80 less variable cost 75 56 Contribution per unit 25 24 PV Ratio 25% 30%
Contribution per Kg of raw material 25/10 24/5 Rs 2.5 Rs. 4.8
Contribution per Labour hour 25/5 24/10 Rs 5 Rs. 2.4
Contribution per machine hr 25/10 24/4 Rs.2.5 Rs. 6
Break even point Rs 600000/25 600000/24 24000 25000 units units
Amity Business School a. When Raw material is in short supply product B is more profitable b. When Labour hours are limited, product A is more profitable c. When production capacity is limited in terms of machine per hr product B is more profitable d. When heavy demand is there product B is profitable due to high PV ratio e. When low demand is there product A is profitable due to low BEP
Amity Business School Try yourself Case 2 Product A Product B Rs Rs Selling price 200 500 Material ( Rs. 20 per liter) 40 160 Labour ( Rs 10 per Hr) 50 100 Variable overheads 20 40 Total fixed cost Rs. 15000 Comment on the profitability of each product when i. Raw material is in short supply ii. Labour hr is limited. iii. Only 1000 liters of raw material is available for both the product in total & maximum sales quantity of each product is 300 units. Amity Business School Case 3. Pricing decision & desire level of profit decision An enthusiastic marketing manager suggests to his managing director that only if he is Permitted to reduce the selling price of a product by 20%, he would be able to achieve a 30% increase in sales volume. The managing director finding that the sales volume increase Exceeds in percentage the extend of requested reduction in price. Further following inform- at ion is given.
Present selling price is Rs. 7.50 per unit Present volume of sales 200000 units Total variable cost is Rs. 10,50,000 Total fixed cost is Rs. 3,60,000 Assume no changes in the costs pattern in the coming period: i. Examine the consequences of the managing director accepting the advise of marketing manager & 30% increased in sales is realized ii. At what volume of sales can the present quantum of profits be sustained, after effecting the price reduction. Amity Business School Case 4. Make or Buy Decision Question A manufacturing company finds that while the cost of making a component 001 in its own workshop is Rs.8 per unit. The same is available in the market at Rs.6.50 with an assurance of continuous supply. Give your suggestion whether to make or buy this component. Also give your view in case the supplier reduces the price of the component from Rs.6.50 to Rs.5.50. Following information can be used to derive a decision. Material Rs 3.00 Direct Labour Rs.2.00 Other Variable Exp Rs.1.00 Depreciation & other fixed Expenses Rs. 2.00 Amity Business School Case 5
A firm can purchase a separate part from an outside source @ $11 per unit. There is a proposal That the spare part can be produced in the factory itself. For the purpose a machine costing $ 100000 with annual capacity of 20,000 unit and a life of 10 yrs will be required. A Forman with monthly salary of $500 will have to be engaged. And the company has to raise Funds @10% p.a. Material required will be $ 4 per unit & wage $2 per unit. Variable overheads are 150% of direct Labour. Advice the firm whether the proposal should be accepted or not.