HI6007 Business Decisions Making: Production Process of ABCD Ltd

ABCD, Ltd. is a sports equipment manufacturer that owns and operates a number of manufacturing plants across the country. The company operates one particular plan where both footballs and basketballs are manufactured. While the company has some flexibility to move manufacturing effort between basketball and football production, the current processes do impose limits on the minimum and maximum number of each ball that can be produced.

Production capacity, cost of materials, labour costs, manufacturing time, and other known constraints are provided below:
Production Capability and Constraints (All unit costs are in $ and time in hours)

• Total Machine hours available: Min 39,000 – Max 40,000 hrs.
• The number of basketballs that can be produced: Min 30,000 – Max 60,000
• The number of footballs that can be produced: Min 20,000 – Max 40,000
• Time to manufacture a Basketball: 0.5 hrs.
• Time to manufacture a Football: 0.3 hrs.
• Cost of labour -- 1 machine hour: $6.00
• Cost of material-- 1 Basketball: $2.00
• Cost of material-- 1 Football: $1.25

ABCD believes it can sell each basketball for $14.00 and each football for $11.00. Further, the company believes that cost of material and labour costs will not change over the next production cycle. The corporate tax rate is 28%.
The company wants to determine the ideal number of basketballs and footballs to manufacture that will maximize the facility’s net profit after taxes.

Be sure to address all relevant points, discuss any assumptions you are making, and highlight the following items in your report:

• A recommendation for the number of basketballs and footballs to manufacture that maximizes net profit after taxes given the existing constraints.

• A discussion of which constraints are binding and the amount of slack or surplus in the remaining constraints.

• A list of recommendations as to what actions the company may take in the future to increase profitability, and how much extra profit the company might expect if the action is taken. Note that these values can be used by the company to determine whether the expected gain in net profit will offset any capital investment required to implement your recommendations.

Introduction:

In the report, various excel tools have been evaluated to manage the production process of ABCD limited. In this report, various excel tools have been used to reach over a conclusion about the total production units. It explains that how much production units must be produced of Football and Basketball by the company.

Purpose of the report:

The main purpose of conducting this study and prepare the report is to evaluate the production process of ABCD limited and make a recommendation to the company about total production units. This report explains to the management of the company that how much basketball and football must be manufactured by the company to improve the profitability position and the overall return of the company. This decision has been made after evaluating all the production aspect of the business.

Description of problem:

The case explains that the ABCD is a manufacturing company which produces the sports equipment that includes football and basketball. On the basis of the given machine hours, total production units of the business has been measured. As well as various other production aspects such as labour hour, selling price etc has also been taken into concern for this report.

Methodology:

To evaluate the company’s production units and the level where the profitability level of the business would be at its best, a excel report has been prepared. In order to solve the case, machine hours has been taken into context and it has been found that in the given machine hours how much units could be produced by the company which could be sold and offer huge return to the company (Brooks & Mukherjee, 2013). The calculations brief the total labour hour to produce the unit of basketball and football is 0.5 and 0.3 hour.

The evaluation explains that in case of manufacturing the football and basketball, machine hours would be 21000 which are quite lesser than the available machine hours. So, the company could improve the production level of equipments. In case of utilizing all the machine hours, company should manufacture 55000 units and 40000 units of basketball and football (Goetsch & Davis, 2014). It would help the company to manage and improve the production level of the business.

In addition, if the production units of the company would be improved than it will lead to the higher sales and ultimately, the total profitability level of the business would also be improved. The case explains that the fixed cost of production is connected to the total machine hours. It further explains that in case of production of 55,000 basketballs, the profitability level of ABCD limited would be $ 3,56,000. And in addition, the profitability level from football would be $ 2,28,960 (Hilton & Platt, 2013).

	Statement of profit
		Basketball		Football
		Per unit	55000 units	Per unit		40000 units
Selling price		$            14	$     770,000	$          11		$       440,000
Less:
Material Cost		$               2	$     110,000	$            1		$         50,000
Labour cost		$                3	$     165,000	$             2		$         72,000
Gross Profit		$               9	$     495,000	$             8		$       318,000
Tax Cost			$     138,600			$         89,040
Net Profit			$     356,400			$       228,960
	Working Note:
	Total Machine Hours		39000-40000		Hours
	In case of 30000 units of basketball, total machine hour would be		15000
	Whereas, In case of 20000 units of football, total machinery hour would be		6000
	Though,  21000 will be the total machine hours and thus the rest machines would be idle. So, it is suggested to the company to enhance the production level of basketball and football.
	Further, in case of 55000 units of basketball, total machinery hour would be		15000
	Whereas, In case of 40000 units of football, total machinery hour would be		12000
	Thus, 39500 hours would  the total machine hours. If the production of basketball and football would be 55000 units and 40000 units. So, company is suggested to the company to manage the Production of basketball and football to 55000 units and 40000 units (Zimmerman & Yahya-Zadeh, 2011).

 

On the basis of the above tables, it has been estimated that the business should produce the 55,000 and 40,000 units of basketball and football to improve the profitability level, production level as well as the utilization of available resources of the business. The calculations explain that the profitability level of the business would also be improved to the $ 3,56,4000 and $ 5,28,960 in case of basketball and football.

Findings:

The above evaluation and the spreadsheet calculations of this case explain about the below findings and these findings must be considering by the management while making better decision about company’s position:

1. The business should take the concern of the fixed cost as well while making decision about the total production units (Garrison et al, 2010).
2. The various items of cost sheet such as variable cost and contribution per units of cost sheet assist the management and other parties to evaluate the exact units of production.
3. In order to generate the total estimated profit of the business, it becomes important to measure the sales unit of the business.
4. All the related factors of the business must be considered while making decision about the production units of the business.
5. The spreadsheet calculations explain that the basketball and football production units of the business must be 55000 and 40000 to utilize the available resources at their maximum and improve the overall level of the business (Drury, 2013).
6. The overall calculations explain that the estimated units would offer the maximum profits to the business.

Conclusion:

On the basis of evaluation on ABCD limited and their production level, it has been measured that the business should produce the 40000 and 55000 units of football and basketball. These changes in the production level of the business would improve the level of the profitability position and utilization of all the resources of the business. The main factor in the production system of the business is total machine hours which mainly affect the production process of the company. The evaluation brief that the company could produce the 40000 and 55000 units of football and basketball.

Further, it has been estimated that in case of production of 55,000 basketballs, the profitability level of ABCD limited would be $ 3,56,000. And in addition, the profitability level from football would be $ 2,28,960 in case of production of 40000 football units.

The management of the company is also suggested to conduct a market feasibility study to evaluate the demand of the football and basketball in the market so that the production could be done in that way. If the demand of the products is lower than it could lead to the business towards the losses.

References:

Brooks, R., & Mukherjee, A. K. (2013). Financial management: core concepts. Pearson.

DRURY, C. M. (2013). Management and cost accounting. Springer.

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Goetsch, D. L., & Davis, S. B. (2014). Quality management for organizational excellence. Upper Saddle River, NJ: pearson.

Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.