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# MGT613 - Production / Operations Management Assignments No.02 Solution and Discussion Fall 2013 Due Date: February 12, 2014

ASSIGNMENT # 02
PRODUCTION/OPERATIONS MANAGEMENT (MGT613)
Marks: 20
Weightage: 0%
Khan Electronics is one of the leading electric appliances manufacturers in the country. Due to its unique business strategy after two every years it increases its range of products (product line). This year they are going to introduce LED TV in the market. They need new technology, skilled labor, equipments and cost effective manufacturing processes as they have to compete with multinational LED manufacturers. In the tight financial situation, the finance department is not ready to make full payment for the required equipment rather it suggested the procurement department to buy it on monthly installment. The procurement department estimates that the equipment can be purchase on lease at the monthly rate of Rs 1000000. Also they made an approximation that the variable cost can be Rs 5000 per LED and it will be sold at price Rs 45000 per LED TV.
Being at the managerial post in the Production/Operations department of Khan Electronics, you need tocalculate the followings:
1. How many LEDs will be sold out at breakeven?
2. What will be the profit or loss if the 500 LEDs are sold out in the one month time period?
3. How many LEDs to be sold out so that the company could earn the net profit of Rs 1000000?
Note:
1. The answer should be in mathematical form only and doesn’t need any theory. But it should also include formulas.
2. The assignment is non-graded and has “ZERO” weightage in course final grading.

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How to Do Break Even Analysis

Break-even analysis is a very useful cost accounting technique. It is part of a larger analytical model called cost-volume-profit (CVP) analysis, and it helps you determine how many product units your company needs to sell to recover its costs and start realizing profit. Learning how to do a break-even analysis is a matter of following a few steps.
Steps

1 Determine your company's fixed costs. Fixed costs are any costs that don't depend on the volume of production. Rent and utilities would be examples of fixed costs, because you will pay the same amount for them no matter how many units you produce or sell. Categorize all your firm's fixed costs for a given period and add them together.

2 Determine your company's variable costs. Variable costs are those that will fluctuate along with production volume. For example, a business that performs oil changes will have to purchase more oil filters if they perform more oil changes, so the cost of buying oil filters is a variable cost. In fact, because the company can expect to buy 1 oil filter per oil change, this cost can be allocated to each oil change performed.

3 Determine the price at which you will sell your product. Pricing strategies are part of the much more comprehensive marketing strategy, and can be fairly complex. However, you know that your price will be at least as high as your production costs (in fact, a lot of anti-trust legislation exists to outlaw selling below cost).

4 Calculate your unit contribution margin. The unit contribution margin represents how much money each unit sold brings in after recovering its own variable costs. It is calculated by subtracting a unit's variable costs from its sales price. Consider the following example using an oil change business.
The sales price of an oil change is \$40 (note that these calculations will work equally well when expressed in other currencies). Each oil change has 3 costs associated with it: purchasing a \$5 oil filter, purchasing a \$5 can of oil, and paying \$10 in wages to the technician performing the oil change. These are the variable costs associated with an oil change.
The contribution margin for a single oil change is: 40 � (5 + 5 + 10) or \$20. Providing an oil change to a customer brings the company \$20 in revenue after recovering its own variable costs.

5 Calculate your company's break-even point. The break-even point tells you the volume of sales you will have to achieve to cover all of your costs. It is calculated by dividing all your fixed costs by your product's contribution margin.
Using the example above, imagine all of your company's fixed costs for a given month are \$2000. Therefore, the break-even point is: 2000 / 20 or 100 units. When 100 oil changes have been performed in a month, the company "breaks even."

6 Determine your expected profits or losses. Once you have determined the break-even volume, you can estimate your expected profits. Remember that each additional unit sold will produce revenue equal to its contribution margin. Therefore, each unit sold above the break-even point will produce a profit equal to its contribution margin, and each unit sold below the break-even point will generate a loss equal to its contribution margin.
Using the example above, imagine your business provides 150 oil changes in a month. Only 100 oil changes were needed to break even, so the additional 50 oil changes generated a profit of \$20 each, for a total of (50 * 20) or \$1000.
Now imagine your business provided only 90 oil changes in a month. You didn't achieve your break-even volume, so you sustained a loss. Each of the 10 oil changes under your break-even volume generated a loss of \$20, for a total of (10 * 20) or \$200.

If you can accurately forecast your costs and sales, conducting a breakeven analysis is a matter of simple math. A company has broken even when its total sales or revenues equal its total expenses. At the breakeven point, no profit has been made, nor have any losses been incurred. This calculation is critical for any business owner, because the breakeven point is the lower limit of profit when determining margins.

Defining Costs

There are several types of costs to consider when conducting a breakeven analysis, so here's a refresher on the most relevant.

• Fixed costs: These are costs that are the same regardless of how many items you sell. All start-up costs, such as rent, insurance and computers, are considered fixed costs since you have to make these outlays before you sell your first item.
• Variable costs: These are recurring costs that you absorb with each unit you sell. For example, if you were operating a greeting card store where you had to buy greeting cards from a stationary company for \$1 each, then that dollar represents a variable cost. As your business and sales grow, you can begin appropriating labor and other items as variable costs if it makes sense for your industry.

Setting a Price

This is critical to your breakeven analysis; you can't calculate likely revenues if you don't know what the unit price will be. Unit price refers to the amount you plan to charge customers to buy a single unit of your product.

• Psychology of Pricing: Pricing can involve a complicated decision-making process on the part of the consumer, and there is plenty of research on the marketing and psychology of how consumers perceive price. Take the time to review articles on pricing strategy and the psychology of pricing before choosing how to price your product or service.
• Pricing Methods: There are several different schools of thought on how to treat price when conducting a breakeven analysis. It is a mix of quantitative and qualitative factors. If you've created a brand new, unique product, you should be able to charge a premium price, but if you're entering a competitive industry, you'll have to keep the price in line with the going rate or perhaps even offer a discount to get customers to switch to your company.

One common strategy is "cost-based pricing", which calls for figuring out how much it will cost to produce one unit of an item and setting the price to that amount plus a predetermined profit margin. This approach is frowned upon since it allows competitors who can make the product for less than you to easily undercut you on price. Another method, referred to by David G. Bakken of Harris Interactive as "price-based costing"encourages business owners to "start with the price that consumers are willing to pay (when they have competitive alternatives) and whittle down costs to meet that price." That way if you encounter new competition, you can lower your price and still turn a profit. There are always different pricing methods that can be used.

The formula: Don't worry, it's fairly simple. To conduct your breakeven analysis, take your fixed costs, divided by your price, minus your variable costs. As an equation, this is defined as:

Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs)

This calculation will let you know how many units of a product you'll need to sell to break even. Once you've reached that point, you've recovered all costs associated with producing your product (both variable and fixed).

Above the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation, this is defined as:

Unit Contribution Margin = Sales Price - Variable Costs

Recording this information in a spreadsheet will allow you to easily make adjustments as costs change over time, as well as play with different price options and easily calculate the resulting breakeven point. You could use a program such as Excel's Goal Seek, if you wanted to give yourself a goal of a certain profit, say \$1 million, and then work backwards to see how many units you would need to sell to hit that number. (This online tutorial  will show you how to use Goal Seek.)

Calculators

There are several online calculators to assist you with your breakeven analysis:

• Case Western Reserve University offers a breakeven analysis calculator  that includes a review of relevant microeconomic terms.
• This financial calculator allows you to chart your costs and profits appear in a graph.
• Inc.com offers a breakeven analysis calculator that requires a user to enter in total annual overhead and annual year-to-date sales and cost of sales, and lets the user delineate the period for the YTD calculations in terms of weeks.

Limitations

It is important to understand what the results of your breakeven analysis are telling you. If, for example, the calculation reports that you would break even when you sold your 500th unit, decide whether this seems feasible. If you don't think you can sell 500 units within a reasonable period of time (dictated by your financial situation, patience and personal expectations), then this may not be the right business for you to go into. If you think 500 units is possible but would take a while, try lowering your price and calculating and analyzing the new breakeven point.

Alternatively, take a look at your costs - both fixed and variable - and identify areas where you might be able to make cuts.

Lastly, understand that breakeven analysis is not a predictor of demand, so if you go into market with the wrong product or the wrong price, it may be tough to ever hit the breakeven point.

Check Laec#17 pag 75 same Exercise

exellnt work  tehrim keep it up

Ans 1: 25 LEDs

Ans 2: Rs.19000000

Ans 3: 50 LEDs

gud tehrim this kind of help is good not cheating not coping but helping to clear concepts from the handout . i like it.

In 3rd point Net profit is required. Its been calculated Annually

Ans 325 LEDs

it is not necessary that net profit is calculated only on annual basis it may be monthly, quarterly and semi annually as well.

Shehroz Net profit is calculated as annually

and in addition to it given data is also on monthly basis. If we consider it as annual profit then the answer is 28 instead of 325

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