University of Hertfordshire MSc Assignment

Week 2 Hand-in Assignment

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.

The question here can also be described as to determine the targeted profit, which goes to mean the unit of goods that need to be sold in order for the company to be able to reach its set profit target. Thus, it is calculated with the formula: ales (units) = Fixed Costs + Target Profit/ Contribution margin per unit

Product A = Estimated demand + targeted profit / contribution margin per unit (targeted profit – variable cost)

           = 3,200 units + £100,000 / (£100,000 - £20.25)

           = £103,200uits / 99,979.75

           = 1.0322 £/unit

Product B = Estimated demand + targeted profit / contribution margin per unit (targeted profit – variable cost)

           = 3,600 units + £120,000 / (£120,000 - £30.5)

           = £103,200uits / 119969.5

           = 0.860 £/unit

Product C= Estimated demand + targeted profit / contribution margin per unit (targeted profit – variable cost)

           = 4,300 units + £150,000 / (£150,000 - £60.4)

           = £154,300uits / 149939.6

           = 1.029 £/unit

Product D= Estimated demand + targeted profit / contribution margin per unit (targeted profit – variable cost)

           = 5,300 units + £200,000 / (£200,000 - £100.55)

           = £205,300uits / 199899.45

           = 1.027 £/unit

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.

This is the point at which the labour house is deemed capable of meeting estimated level of production. The formula is: labour hour = market estimate

Product A= since 0.25 = 1,000 units, then for 3,200 units, the optimum level is (3,200/1000) x 0.25 = 0.80 labour hours

Product B= since 0.5 = 1,500 units, then for 3,600 units, the optimum level is (3,600/1,500) x 0.5 = 1.2 labour hours

Product C= since 0.4 = 1,400 units, then for 4,300 units, the optimum level is (4,300/1,400) x 0.4 = .22 labour hours

Product D= since 0.55 = 2,100 units, then for 5,300 units, the optimum level is (5,300/2,100) x 0.55 = 1.39 labour hours

3. Propose ways that could help the company to solve the problem of special machine time shortage (around 300 words).

One of the ways to solve the issue of special machine time is by the company constantly evaluating the performance of their variable labour in order to determine the level of changes in output and correct such changes before they pose risk to the company’s sustainability. This can be viewed to be more like a precautionary measure towards unpredictable circumstances as it ensures that issues related to output and performance of the company as easily identified and corrected in time to avoid unforeseen circumstances.

Outside the above recommendations, it is also necessary for the company to monitor market demand as changes in the demand curve will affect overall changes in the company’s performance – in terms of its capability to meet market demand with available labour. As such, it is important for the company to manager its human resources and provide a sustainable means of meeting market demands.