Production and Operations Management

Assignment No.1

Submitted to: Dr. Irshad Khan

Submitted by: Oozema Zafar ID: 9883 Dated: 20th march 2014

Question 01:
Estimate Project Cost and outline a plan for financing of the project? Answer: Project Cost = Capital Cost + Working Capital Cost Capital Cost: Cost of Plant Land, Building & other facilities Pre-Operational Expenses Total Capital Cost Working Capital: Assumption: 15 days of FG and 30 days Raw Materials are kept in stock and Production is assumed as 100 tons per month. - You will further see the elaboration of Working Capital in Part 06. FG (15 days) Selling Price x no. of units needed to produce for the next 15 days = (85.1x50,000) Price of RM x RM Required to yield 1 Kg of FG x assumed production = (10 x 6.66 x 100,000) Rs. 4,255,000 Rs. 30,000,000 Rs. 10,000,000 Rs. 5,000,000 Rs. 45,000,000

RM (30 days)

Rs. 6,660,000

Total Working Capital Cost (01 Month)

Rs. 10,915,000

Total Annual Working Capital Cost = 10,915,000 x 12 = Rs. 130,980,000 Hence, Project Cost would be: Rs. 45,000,000 + 130,980,000 = Rs. 175,980,000 Finances of Project: The partners will be investing Rs. 5 Million each, which makes it Rs 15 Million. The rest of the amount i.e. Rs. 160,980,000 would be taken as a loan from bank at an interest of 10% per year.

Question 02: What should be the installed capacity of the plant?

Answer: 1500 tons should be the installed capacity.

Question 03: Prepare a monthly sale and production plan for first year of project.
Answer: Assumptions: Closing stock is 10% of every months sale. The sales of the product would be fluctuating between 90 to 110 tons. Month 1 2 3 4 5 6 7 8 9 10 11 12 Opening Inventory 0 9 10 10 9 10 11 10 11 11 10 9 Production 99 101 100 89 101 111 99 111 110 99 89 101 Sales 90 100 100 90 100 110 100 110 110 100 90 100 Closing Inventory 9 10 10 9 10 11 10 11 11 10 9 10

Yearly Sales = 1200 tons

Question 04: Determine Manpower Cost, Unit Variable Cost of product and fixed Cost.
Answer: a) Manpower Cost: Categories Managers Supervisors Skilled Workers Semi Skilled Workers Unskilled Workers Grand Total Salary Monthly Salary Rs. 30,000 Rs. 12,000 Rs. 8,000 Rs. 5,000 Rs. 3,000 Requirement 04 06 10 30 40 Salary of Required Personnel Rs. 120,000 Rs. 72,000 Rs. 80,000 Rs. 150,000 Rs. 120,000 Rs. 542,000

b) Unit Variable Cost: Manufacturing Cost + Cost of RM to Produce 1 Kg of FG + Direct Labour Cost i) Manufacturing Cost = Given Manufacturing Cost is Rs. 15 per Kg. ii) Cost of RM to Produce 1 Kg of FG: 1 Kg of RM = 0.15 Kg of FG 1 Kg of FG = (1/0.15) Kg of RM 1 Kg of FG = 6.66 Kg of RM Cost of 1 KG of RM = Rs. 10 per Kg Therefore, Cost of 6.66 Kg of RM which will produce 01 Kg of FG will be: 6.66 x 10 = Rs.66.66

iii) Direct Labour Cost: Categories Skilled Workers Semi Skilled Workers Unskilled Workers Total Direct Labour Cost Monthly Salary Rs. 8,000 Rs. 5,000 Rs. 3,000 Requirement 10 30 40 Salary of Required Personnel Rs. 80,000 Rs. 150,000 Rs. 120,000 Rs. 350,000

As already stated, assumed production is 100 tons. Therefore, Direct Labour per Unit Cost will be: (350,000/100,000) = Rs. 3.5 per unit. Now, Unit Variable Cost = 15 + 66.66 + 3.5 = Rs. 85.16

c) Fixed Cost: Interest Depreciation of Plant Depreciation of Building Depreciation of Fixtures & Fittings Salaries
4

Rs. 16,098,000 Rs. 3,000,000 Rs. 500,000 Rs. 1,000,000 Rs. 2,304,000

Total Fixed Cost (Annual)

(30000x04+12000x06)x12 Rs. 22,902,000

Assumptions: Pre-Operational expenses are considered as the cost of fixtures and fittings.

Question 05: For 10 million profits per year what should be the sale price of product.
Answer: Sales [Variable Cost + Fixed Cost] = Profit [(1,200,000S) {(1,200,000 x 85.16) + 22,902,000} = 10,000,000 [1,200,000S (102,192,000+22,902,000)] = 10,000,000 1,200,000S 125,094,000 = 10,000,000 1,200,000S = 10,000,000 + 125,094,000 1,200,000S = 135,094,000 S = (135,094,000/1,200,000) Selling Price = Rs. 112.57 = Rs. 113 per Kg.

Question 06:
How much working capital will be required? Assume that 15 days of finished product and 30 days requirement of raw material are kept in stock. Answer: Total Working Capital = 15 days of FG + 30 days requirement of Raw Material. i) 15 days of FG: Selling Price x 15 days FG in Units 15 days FG = 85.16 x 50,000 units (assuming 100 tons production in a month) 15 days FG = Rs. 4,258,000 ii) 30 days requirement of Raw Materials: Price of RM x 100 tons x RM required to produce 1 kg of FG 30 days requirement of RM = 10 x 100,000 x 6.66 = Rs. 6,660,000

Total Working Capital = 4,258,000 + 6,660,000 = Rs. 10,918,000

Question 07: What will be the yearly profit in next three years? What will be the breakeven
sale volume? Year 1: Assumption: 1200,000 units are sold in the year. Profit = Income Expenses Profit = (1,200,000 x 113) [(1,200,000 x 85.16) + 22,902,000] Profit = 135,600,000 [102,192,000 + 22,902,000] Profit = 135,600,000 125,094,000 Profit = Rs. 10,506,000

Year 2: Assumption 1250,000 units are sold in the year. Profit = Income Expenses Profit = (1,250,000 x 113) [(1,250,000 x 85.16) + 22,902,000] Profit = 141,250,000 [106,450,000 + 22,902,000] Profit = 141,250,000 129,352,000 Profit = Rs. 11,898,000

Year 3: Assumption 1150,000 units are sold in the year. Profit = Income Expenses Profit = (1,150,000 x 113) [(1,150,000 x 85.16) + 22,902,000] Profit = 129,950,000 [97,934,000 + 22,902,000] Profit = 129,950,000 120,836,000

Profit = Rs. 9,114,000 Breakeven Volume: (Fixed Cost/ Contribution Margin) & Contribution Margin = Unit Selling Price Unit Variable Cost

Therefore, Breakeven Volume = [22,902,000/(113-85.16)] Breakeven Volume = (22,902,000/27.84) Breakeven Volume = 822,629.31 units = 822,630 units approx. Breakeven in Rs. = Breakeven Volume x Unit Selling Price Breakeven in Rs. = 822,630 x 113 = Rs. 92,957,190