Case Problem Vajra Tools

Nandita Mehta has just earned a University degree (Post graduate) in Management. She has taken position of Executive Assistant to the president at Vajra Tools. The company manufactures tungsten carbide drill steels for mining industry of 2 sizes inch diameter & 1 inch diameter. The manufacturing takes place in three departments. In the tip fabricating department tungsten carbide tips are manufactured from powdered wolfram. In the steel forging department, the steel rods are slotted and prepared for the insertion of the tips. The assembly department puts the tips & steel rods together in a brazing process. Each department has two severe general capacity limits. The first constraint prohibits further capital expenditure because of a weak liquid position arising from past losses. The second constraint is the local labor situation in Vasai, which makes the hiring of more labor or using overtime virtually impossible. The capacity of each department in (lakh of hrs) is 1.5, 2.75 & 3.5 for Departments A , B & C resp. The finance manager has just completed the budget for the forthcoming year 2012-13. Due to lackluster performance of several mutual funds, bearish stock markets & hence renewed investor confidence in Gold, the company is expected to operate at full capacity. The Manager has prepared analysis of the last year 2011-12 . ( Rs/ unit ) inch Quantity ( units ) Selling Price Material Costs: Steel Tungsten Dept A B C Variable Overheads Fixed Overheads Total Cost Labor 175000 60 ? ? 5 8 8 ? ? ? 1 inch 225000 70 ? ? 4 12 5 ? ? ?

The market survey performed by the Sales Manager showed that the company could sell as many of either type of rods as it could produce. However the Sales Manager urged that the needs of 3 big Gold Mines must be satisfied in full even though doing so meant producing a large no of inch rods. The quantities required by these three gold mines amounted to 2L pieces of each type of steel rod. He also suggested that balance capacity is to be used to produce 1 inch rods. He submitted the budgeted income statement as per this suggested plan. Nandita as her first assignment is asked by the President to comment on the budgeted income statement. Specifically the President wants to know how much it will cost the company in lost profit to supply the full needs of the three big Gold Mining Customers. He feels it might be more profitable to allocate balance resourses in optimum manner to both products. Nandita gathered the following additional information before making her recommendations. Wolfram is purchased at 10/kg. The inch tip uses 200 grams & 1 inch tip uses 300 grams. The special alloy steel costs 2/kg. The inch rod uses 1.5 kg & 1 inch rod uses 2 Kg. The hourly wage rate in 3 departments A, B & C is 20, 16 & 10 resp. The availability of steel is 800,000 kg & of Tungsten (or Wolfram ) is 110,000 kg. The variable overheads are allocated as 40% of labor cost. Fixed overheads of 85 L are allocated on basis of prime cost. Tip fabricating (Dept A ) is a skilled process. The small tips require detailed work. The labor in this department is difficult to replace.

Required: Cost volume profit statement with comments on sensitivity analysis of solution for the forthcoming year as per 1. The Sales Manager 2. The President 3. Optimum plan