pom assignment 1

8/12/2019 POM Assignment 1

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Production and Operations Management

Assignment No.1

Submitted to: Dr. Irshad Khan

Submitted by: Oozema Zafar

ID: 9883

Dated: 20thmarch 2014


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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 Rs. 30,000,000

Land, Building & other facilities Rs. 10,000,000

Pre-Operational Expenses Rs. 5,000,000

Total Capital Cost Rs. 45,000,000

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 Part06.

FG (15 days) Selling Price x no. of units

needed to produce for the

next 15 days = (85.1x50,000)

Rs. 4,255,000

RM (30 days) Price of RM x RM Required

to yield 1 Kg of FG x

assumed production = (10 x6.66 x 100,000)

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.


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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 Opening

Inventory

Production Sales Closing

Inventory

1 0 99 90 9

2 9 101 100 10

3 10 100 100 10

4 10 89 90 95 9 101 100 10

6 10 111 110 11

7 11 99 100 10

8 10 111 110 11

9 11 110 110 11

10 11 99 100 10

11 10 89 90 9

12 9 101 100 10

Yearly Sales = 1200 tons

Question 04:Determine Manpower Cost, Unit Variable Cost of product and fixed Cost.

Answer:

a) Manpower Cost:Categories Monthly Salary Requirement Salary of Required

Personnel

Managers Rs. 30,000 04 Rs. 120,000

Supervisors Rs. 12,000 06 Rs. 72,000

Skilled Workers Rs. 8,000 10 Rs. 80,000

SemiSkilledWorkers

Rs. 5,000 30 Rs. 150,000

Unskilled Workers Rs. 3,000 40 Rs. 120,000

Grand Total Salary Rs. 542,000


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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 Monthly Salary Requirement Salary of Required

Personnel

Skilled Workers Rs. 8,000 10 Rs. 80,000

SemiSkilledWorkers

Rs. 5,000 30 Rs. 150,000

Unskilled Workers Rs. 3,000 40 Rs. 120,000

Total Direct Labour

Cost

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 Rs. 16,098,000

Depreciation of Plant Rs. 3,000,000

Depreciation of Building Rs. 500,000

Depreciation of Fixtures & Fittings Rs. 1,000,000

Salaries Rs. 2,304,000


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(30000x04+12000x06)x12

Total Fixed Cost (Annual) 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

1,200,000S125,094,000 = 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


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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 = IncomeExpenses

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 = 135,600,000125,094,000

Profit = Rs. 10,506,000

Year 2:

Assumption 1250,000 units are sold in the year.


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 = 141,250,000129,352,000

Profit = Rs. 11,898,000

Year 3:

Assumption 1150,000 units are sold in the year.


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 = 129,950,000120,836,000


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Profit = Rs. 9,114,000

Breakeven Volume: (Fixed Cost/ Contribution Margin)

& Contribution Margin = Unit Selling PriceUnit 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

pom assignment 1

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