Hype Ltd Company

Questions: Hype Ltd produces four types of clothes with the use of a special machine. Each labor hour in the special machine costs 10. For the production of the four products the company has 6,800 special machine labor hours. There will be no shortage of any other factor of production. Costings and break-even quantities for the products are as follows: Products A (Jeans) B (Shirts) C (Jackets) D (Coats) Material cost per unit 20 30 60 100 Special machine labor hours per unit 0.25 0.5 0.4 0.55 Fixed costs 40,000 50,000 70,000 120,000 BEP (break-even point) quantity 1,000 1,500 1,400 2,100 For each type of product the management of the firm aims at the following targeted profit levels: Product Target Profit A 100,000 B 120,000 C 150,000 D 200,000 However, the marketing department has conducted a consumer survey and estimated that the actual demand for the products will be different from that corresponding to the targeted profits. The estimated quantity demanded for each product is given in the table below: Product Estimated Quantity Demanded A 3,200 B 3,600 C 4,300 D 5,300 REQUIRED: 1. Calculate the volume of activity that the company will have to achieve in order to meet the targeted level of profit for each one of the four products.2. Calculate the optimal production each of for the four products by taking into account the available labor hours and the estimates of the marketing department.3. Propose ways that could help the company to solve the problem of special machine time shortage. Answers: 1. The volume of activity that the company will have to achieve in terms of the labor hours and sales (units). The break even number of units has been provided. Based on this the per unit sales price is estimated based on the formula (Sales price Variable Cost) X Break Even Point quantity = Fixed Price The variable cost is the sum of material cost and labor cost. Based o the sales price and the estimated profit the number of units to be produced to achieve the profit level are calculated In order to earn profit the number of units that will have to be produced is given by Number of units = (Profit Fixed Cost)/ (Sale Price per unit variable cost per unit) Based on the number of units the amount of special machine labor hours that will be employed is calculated by multiplying the number of hours required for one unit with the number of units. The complete table is shown below Products A (Jeans) B (Shirts) C (Jackets) D (Coats) Material cost per unit 20 30 60 100 Special machine labor hours per unit 0.25 0.5 0.4 0.55 Special machine labor cost per unit 2.5 5 4 5.5 Total Variable Cost per unit 22.5 35 64 105.5 Fixed costs 40000 50000 70000 120000 BEP (break-even point) quantity 1,000 1,500 1,400 2,100 Total Variable Cost (BEP) 22500 52500 89600 221550 BEP Sale Revenue 62500 102500 159600 341550 BEP Sale Price 62.5 68.33333 114 162.6428571 Estimated Profit 100000 120000 150000 200000 Sales Units 3500 5100 4400 5600 No. of labour hours 875 2550 1760 3080 2. As shown above the number of units that can be produced for each product is Sales Units 3500 5100 4400 5600 However the expected demand is lower than the above figures and thus the production should be limited to the expected demand. Considering this if the products A,B C are produced based on the lowest number of total labor hours employed, the expected demand will be utilized. However certain number of hours will be remaining i.e. 1615 hours. From this balance hours 2936 units of product D can be produced. It is important to note that since labor hours are limited the product with maximum profit margin per labour hour employed should be produced. These figures have been shown below Profit Margin per unit 40 33.33333 50 57.14285714 Profit Margin per labour hour 160 66.66667 125 103.8961039 Considering this first product A should be produced followed by product C and then D and lastly the product B should be produced. Producing product C, D and A as per the optimal production the number of hours that will be consumed will be 5435 hours. The balance hours will be 1365 hours. Number of units of product B that will be produced will be 2481. 3. It is important to note that since labor hours are limited the product with maximum profit margin per labour hour employed should be produced. These figures have been shown below Profit Margin per unit 40 33.33333 50 57.14285714 Profit Margin per labour hour 160 66.66667 125 103.8961039 Considering this first product A should be produced followed by product C and then D and lastly the product B should be produced. Producing product C, D and A as per the optimal production the number of hours that will be consumed will be 5435 hours. The balance hours will be 1365 hours. Number of units of product B that will be produced will be 2481. This combination will maximize the profitability as the highest margin generating products have been produced first. This strategy should be employed as it will be the most beneficial.