CHAPTER 2: OPERATIONS STRATEGY

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Problem 1 Given Data Fixed Cost = F = Rs. Demand Working days in a year Variable cost = v Price = p Total annual demand (a) Breakeven point 600,000.00 50 250 90 150 12,500 /per day days per roll per roll

10,000 units

(b)

Since current annual production = Profit = Rs. 150,000.00

12,500

which is greater than breakeven point; Quick Photo Solutions is making profits

( c)

New variable cost = v' Breakeven point

100 per roll 12,000 units 12,500 which is still greater than breakeven point; Quick Photo Solutions is making profits

Since current annual production = Profit = Rs. 25,000.00

(d)

Old Breakeven point 10,000 units Breakeven period 200 days New breakeven point 12,000 units To retain same breakeven period, demand should be

60

per day

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Problem 2 Given Data Fixed Cost = F = Rs. 250,000.00 Cost of one paper 5 Cost of power per page 12 Labor cost per page 23 Variable cost = v 40 Price = p 60 (a) (b) Breakeven point Extreme Demand (low) Number of days to breakeven Extreme Demand (high) Number of days to breakeven New price = p' Breakeven point Daily demand as per estimate Number of days to breakeven 12,500 125 100 500 25 55 16,667 500 33

/paisa paisa paisa paisa paisa pages per day days per day days paisa units per day days

( c)

He would be able to acheive breakeven 8 days later (d) Old fixed Cost = F = Rs. Additional fixed cost = Rs. Total Fixed Cost = F = Rs. Cost of one paper Cost of power per page New labor cost per page Variable cost = v Price = p Breakeven point Assuming low demand = Number of days to breakeven Assuming high demand = Number of days to breakeven 250,000.00 50,000.00 300,000.00 5 12 18 35 60 12,000 125 96 500 24 ///paisa paisa paisa paisa paisa pages per day days per day days

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Problem 3 Machine A 20,000 5 4,000 Machine B 40,000 4 10,000 Machine C 80,000 3 26,667

Fixed Cost Variable cost per unit Volume production required

If Machine A is used the total cost is FC(A)+VC(A)*x If Machine B is used the total cost is FC(B)+VC(B)*x where x is the production volume Therefore solving for the point of indifference we get 20,000+ 5x = 40,000 +4x Hence x = 20000 units If Machine B is used the total cost is FC(B)+VC(B)*x If Machine C is used the total cost is FC(C)+VC(C)*x where x is the production volume Therefore solving for the point of indifference we get 40,000 +4x = 80,000 + 3x Hence x = 40000 units

Upto a production volume of 20,000 units Machine A is recommended, for production volumes between 20,001 and 40,000 Machine B is recommended, for production volumes greater than 40,000 Machine C is recommended. The graph below shows the minimum cost zones for all the three machines.

Total Cost vs Production Volume

Machine A Machine B Machine C

300000

250000

Total Cost

200000

150000 40,000 units 100000

50000

20,000 units

0 0 10000 20000 30000 40000 50000 60000

Production Volume

Cost - Volume Relationships for the three options Prdn 0 5000 10000 15000 25000 30000 35000 40000 45000 50000 55000 TCA 20000 45000 70000 95000 145000 170000 195000 220000 245000 270000 295000 TCB 40000 60000 80000 100000 140000 160000 180000 200000 220000 240000 260000 TCC 80000 95000 110000 125000 155000 170000 185000 200000 215000 230000 245000