ASSIGNMENT 1: OPERATIONS DECISION 2
The company that I am consulting is Simple Simon’s Pecan Pie Factory. Simple Simon’s has been producing pecan pies for thirty years and is an established and well-recognized competitor in the gourmet pie market. The company has two manufacturing plants in Tifton, GA and Charleston, SC, and ships its pies all over the world. Recently, I was contacted by the president of the company, Simon Fair, to make recommendations on how to turn around the company’s floundering operations. Over the last three years, Simple Simon has seen its market share fall and its revenue decline 15% each year. There have been several competitors that have entered the market within the last five years that have taken
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Competitors have used this fact to differentiate themselves from Simple Simon.
Simple Simon’s current financial situation is tenuous. The company is producing 6,000 units per month, but after all variable and fixed costs, they are losing $40/month. The company’s labor costs are extraordinarily high. The current labor cost is $23.33/unit, which is 72.9% of the $32 sales price (See attached Table 1).
The production function of a firm relates the quantity of inputs to the quantity of outputs. For this analysis, Simple Simon’s production function is a linear function with labor as its only input. Production functions can be short run or long run. In the short run, capital inputs like plant and machinery are fixed and only variable inputs like labor and raw materials can be changed (Production Functions, p.1). Depending on what stage of production the firm is in, the law of diminishing returns affects the level of output. The law of diminishing returns states that as more units of a variable input (i.e. labor) are added to fixed amounts of land and capital, the change in total output will at first rise and then fall. Simple Simon is so under-utilizing its labor that even if the number of workers is doubled, there is still not a reduction in the level of output per unit of labor.
There are several steps Simple Simon’s should undertake to increase profitability. In the short-run, the company should reduce the cost of labor to $65
The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .
Martinez Company’s relevant range of Production is 7,500 to 12,500 units. When it produces and sells 10,000 units, its unit costs are as follows:
In business there are certain factors that have to be evaluated before a company can see if a profit has been made. To even get to the point where a profit will be made there has to be a product that is sold whether it is a tangible or an intangible product. There has to be something that the business is selling in order to make that profit. The amount of profit that is attained is the outcome of the total revenue minus the total cost. This will then show the business what the remaining profit is. Business is like a puzzle, all the pieces have to fit and work together to have the puzzle complete. In business things have to work together or it won’t work and all the hard work that was put in to making
If Marlene Herbert were to discontinue place mats, he would miss $270,000 that will go toward Mendel paper company fixed cost. The company currently has a plant overhead that is estimated at $420,000 for the quarter. In addition to the fixed plant overhead, the plant incurs fixed selling and administrative expenses per quarter of $118,000. This draws the company to a total fixed cost of $538,000. If Marlene Herbert were to discontinue the second highest contributor to the fixed cost, he would need to increase the volume of computer paper and lower material cost to help pull the contribution margin of the lowest product up to help support the lost of a whole product line.
Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 10% of the year's projected sales; for example, NWC0 = 10%(Sales1). The servers would sell for $24,000 per unit, and Webmasters believes that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company’s
Big Tex wants his new manager (the same one mentioned in part d. above) to oversee a proposed hotel gift shop. The small gift shop will increase his ADR by 1%, his variable costs by 5 %, and his fixed costs by $24,000.
The scenario seems more realistic because they are growing in a steady rate. If we add up the first years operating cash flow than it would come out to a positive $255,586. Which means that Miller would be able to pay off his fixed and variable costs.
The MDMP is the Army's solution to decision-making and assists the commander and staff in developing a plan and estimates. The MDMP is analytical and detailed through all levels. The commander decides the procedures to use in each instance, his plan hinges on clear visualization, and he uses the entire staff to make his plan. The steps in the MDMP are the following:
(iii) Economies of scale is where the long-run average cost declines as production increases in simple explanation
Superior Metals Company has seen its sales volume DECLINE over the last few years as the result of rising foreign imports. In order to INCREASE sales (and hopefully, profits), the firm is considering a price reduction on luranium, a metal that it produces and sells. The firm currently sells 60,000 kilos of luranium a year at an average price of $10 per kilo. Fixed costs of producing luranium are $250,000. Current variable costs per kilo are $5. The firm has determined that the variable cost per kilo could be reduced by $0.50 if production
|Varying workforce size by |Avoids the costs of other |Hiring, layoff, and training |Used where size of labor pool |
In addition, the production function has constant returns to scale in capital and labour while knowledge is held fixed as it shown:
The quantity of capital is fixed at K = K0 in the short run. Hence, the production function is a function of labour (L), keeping K fixed. The amount of labour services is variable. Changing the number of people hired, or changing the working hours of each employee, or both, can vary the amount of labour services. However, here we assume that there is no distinction between the variations in the number of people hired and working hours. This trait of the labour demand is discussed in the Chapter 6. Also, the possibility of the labour being a “quasi-fixed factor” in the short run is discussed later.
Increasing returns are the natural outcome of decreasing output costs and have external and internal factors which influence economies of scale (Ossa, n.d.). Economies of scale are influenced externally by industry size, rather than firm size and include