24 Mar Hype Ltd produces four types of clothes with the use of a special machine. Each labor hour in the special machine costs ?10. For

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

The company has to solve the problem of shortage of resources very strategically. Company has the following options to solve the problem:

a. Increase the number of machine hours by adding new machines, which will involve the investment cost. The company must be very careful while considering the marketing department demand survey, if it is factual and can be achieved and will be for longer period, the company should make this investment. The company should properly analyze the investment by using various techniques such as return on investment, net present value, etc. If the evaluation is favorable the company may go for the new machines.

b. The company may outsource the production of product B, if the demand is for temporary period. But company must make sure that the outsourcing should be done if the cost and quality offered by supplier is better than or equal to what is produced by the company itself. Even if the cost is more than what is produced by the company itself, it should at least create a positive contribution margin after deducting the cost offered by supplier form selling price. The company should also make sure that the supplier will provide the goods in time and there would be stability in the cost, it is possible that at current the supplier offer a cheaper price to obtain the order and then later on, ask for more price.

c. Another way of handling the situation if the demand in the market is for longer period and stability in the future demand. The company may outsource at current and may gradually increase its capacity by installing new machines. It can be done if the company has problem in investment due to shortage of cash flows or even the company has cash flow, the company will have enough time to properly analyze the situation.

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