COMBINE Akib sir

1
Combined by Md. Selim Reza

DEGREE PROGRAM: B.Sc. in Mechanical Engineering
COURSE CODE: ME - 4201
COURSE TITLE: Production Planning and Control
CREDIT: 4.0 (Theory) TERMS OFFERED: 4th year 1st semester
Exam Hours: 4.00 CIE Marks: 30% SEE Marks: 70%
Course Objectives/Summary: The purpose of this course is to develop knowledge and skills
required to run a production unit and to optimize the use of resources in achieving organizational
goals.
Course Learning Outcomes (CLOs): at the end of the Course, the student will be able to
CLO1 Understand production planning and control techniques.
CLO2 Analyze forecasting techniques, product development, production scheduling,
breakeven point.
CLO3 Apply analytical and statistical methods, inventory modeling, project management,
time and motion study, capacity analysis.
CLO4 Evaluate statistical and analytical methods, optimization of the production processing
cost and time.
CLO5 Design process plant layout.
Mapping of Course Learning Outcomes (CLOs) to Program Outcomes (POs):
PO1 PO2 PO3 PO4 PO5 PO6 PO7 PO8 PO9 PO10 PO11 PO12
CLO1  
CLO2  
CLO3  
CLO4  
CLO5   
SN COURSE CONTENT Hrs CLOs

1 Introduction: Functions of production planning & control, 3 CLO1
production planning systems & master production schedule.
MRPII, JIT.
2 Forecasting: Coordination between sales, manufacturing and 5 CLO2, CLO3
purchase departments, techniques of forecasting.
3 Break even analysis: Break-even point and its interpretation, 6 CLO2, CLO3
profit volume ratio and its application to new design, multi-
2
SN COURSE CONTENT Hrs CLOs

product profit volume ratio. Break even analysis to step wise
cost variation.
4 Product and Production Systems: Product development & design 3 CLO5
product analysis, types of production schedule.
5 Inventory: Inventory systems, purchase inventory model, 4 CLO2, CLO3
EOQ, production inventory model, EPQ, quantity discounts
in inventory, safety stock & reorder levels.
6 Materials requirement planning, Capacity requirements planning. 3 CLO5
7 Scheduling: Concepts and techniques-Gantt-chart, CPM, PERT, 8 CLO3, CLO4
Index method, and line of balance.
8 Designing production systems: Plant location and its 5 CLO5
evaluation, Plant layout, types of plant layouts and their
analysis, evaluation of plant layout.
9 Time & motion study 2 CL02
Teaching-Learning Strategies: Classroom lecture (white board and power point presentation),
reading, and solving practical problems, showing practical systems, feedback.
TEXTBOOK
1. Norman Gaither & Greg Frazier, Production and Operations Management, South-
Western College Pub.
REFERENCE BOOKS
1. Roberta S. Russell & Bernard W. Taylor, Operations Management, Wiley
2. S. Anil Kumar & N. Suresh, Production and Operations Management, New age
International publishers.
ASSESSMENT PATTERN
CIE- Continuous Internal Evaluation
Bloom’s Category Class Tests (%) In class Participation (%)
Remember 15 50
Understand 15 50
Apply 20
Analyze 30
Evaluate 20
SEE- Semester End Examination

Bloom’s Category Final Exam (%)
Remember 05
3
Understand 10
Apply 15
Analyze 25
Evaluate 20
Create 25
4
Break Even Analysis

Fixed Cost: Fixed cost in independent of the units of out
Ex: Executive Salaries, Equipment, depreciation of pl administration, rent, insurance etc.
Variable Cost: Which varies with units of output?
Ex: materials, labor and direct cost related to the production.
The total cost is given by the summation of variable cost and fixed cost and the point of
intersection of this line with sales value is break even point corresponding to the sales volume
(units) Q1.
F + aQ1= bQ1 F Fixed Cost

𝐹 a Variable cost/unit
⇒ Q1 = (𝑏−𝑎)
b Price per unit
Break Even Point (BEP): The point of intersection of the total cost line with sales value is Break
even point. At this point profit and loss are equal.
Margin of Safety: Excess sales over and above breakeven point or distance between breakeven
point and present sales or production.
Angle of Incidence: The angle between sales value and total cost line.
Large angle of incidence and long margin of safety is more profitable/Desirable/effective of a

company.
5
The breakeven point is lowered in the following ways:-

𝐹′
1. Reduced fixed cost: 𝑄1′ = 𝑄1 𝐹
(𝑏−𝑎)
2. Reduced Variable cost: 𝑄1′ = 𝑄1 (𝑏−𝑎′)
𝑏−𝑎
3. Increase price rate: 𝑄1′ = 𝑄1 𝑏′ −𝑎
4. Increase output.
5. Combination of two or move.
Assumptions (for break event chart):
i). Variable cost varies directly and proportionately with units of output.
ii). Fixed cost remain unchanged with unit of output.
iii). Price rate is constant.
Solve following problem. Calculate BEP for different condition.
Units of Fixes cost Variable cost Total cost Sales

output Revenue
10 30 10 40 17.5
20 30 20 50 35
30 30 30 60 52.5
40 30 40 70 70
50 30 50 80 87.5
60 30 60 90 105
70 30 70 100 122.5
80 30 80 110 140
Total = 360 240 360 600 630
Avg = 45 30 45 75 78.75
a = VC (Variable Cost) per unit

𝑎𝑣𝑔.𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 45
= = =1
𝑎𝑣𝑔.𝑢𝑛𝑖𝑡 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 45
6
78.75
b= = 1.75
45
Sales price per unit
Units of output for profit and loss to be equal;

𝐹 30
𝑄1 = = = 40 𝑢𝑛𝑖𝑡𝑠.
𝑏 − 𝑎 1.75 − 1
Reduced Variable cost:
𝑏−𝑎
𝑄1′ = 𝑄1
𝑏−𝑎′
All are constant except the value of a reduce from 1 to 0.75

1.75 − 1
∴ 𝑄1′ = 40 ∗ = 30 𝑢𝑛𝑖𝑡𝑠
1.75 − 0.75
Reducing Variable Cost:
Suppose a company wants to make profit of tk-30. by reducing variable cost from tk
1 per unit to Tk 0.75 per unit.
Fixed cost, selling price = constant
What is the b.e.p now and how much it should produce to earn its planned profit.
𝑏−𝑎 1.75 − 1
𝑄1′ = 𝑄1 ( ) = 40 × = 30 𝑢𝑛𝑖𝑡𝑠
𝑏 − 𝑎′ 1.75 − 0.75
𝐹𝐶 30
or, 𝑄1′ = = = 30 𝑢𝑛𝑖𝑡𝑠.
𝑏−𝑎′ 1.75−0.75
𝑃𝑟𝑜𝑓𝑖𝑡+𝐹𝐶 30+30
Planned Profit, 𝑄 = = = 60 𝑢𝑛𝑖𝑡𝑠
𝑏−𝑎 1.75−0.75
b = Selling cost/unit
a = variable cost/unit
𝐹𝐶
B. even Sales volume = 𝑡𝑜𝑡𝑎𝑙 𝑉.𝐶
1−
𝑡𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑖𝑛𝑢𝑒
7
The fixed investment for manufacturing a product is a particular year is Tk 80,000.

The estimated sales for this period are Tk 200000. The variable cost per units for this
product is Tk.4. If each unit is sold at Tk 20.
Then what would be the production volume at breakeven point.

𝐹 𝐹𝐶
BEP = BE sales volume = 𝑇𝑜𝑡𝑎𝑙 𝑉𝐶
𝑏−𝑎 1−
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑖𝑛𝑢𝑒
80000 80000
= = 5000/units = 5000×4
20−4 1−
5000×20
= 100000 units.
Reduce in Fixed Cost
❖ Now consider a company to earn of Tk 30 and it has reduced its fixed cost Tk 30
to Tk 25, variable cost, selling price are constant.
1. BEP =?
2. How much it should be produced in order to earn profit 30 Tk.
F′ Fc′
Q′1 = Q1 . Or, Q′1 =
F b−a
25 25
⇒ Q′1 = 40 × = 33.33 = = 33.33 units.
30 1.75−1
Planned profit is achieved, when,

Profit+FC 30+25
Q= = = 73.33 units.
b−a 1.75−1
8
Reduce selling price:
❖ If Company wants to earn a profit Tk 30 by increasing its price to Tk 2.20 per

unit. From Tk 1.75 per unit. Fixed and variable cost are constant. Find
1. BEP
2. How much product need to profit achieve profit?
Fc′ 30 b−a
Q′1 = = Q′1 =Q1
b′ −a 2.2−1 b′ −a
1.75−1
= 25 units. = 40 = 25 units
2.2−1
Planned profit t is achieved when
Profit + Fc 30 + 30
Q= = = 50 Units.
b′ − a 2.2 − 1
❖ A compass wants to earn profit Tk 30. by increase sing. Its selling price from Tk
1.75 per unit to Tk 2.25 per unit and reduce its variable cost from Tk 1 per unit to
0.75 per unit.
1. BEP
2. How much product need to profit achieve profit?
Fc′ 30
Q′1 or bep = = = 20 units
b′ −a′ 2.25−0.75
b−a 1.75−1
Or, Q′1 = Q1 ( ) = 40 × 2.25−75 = 20 units
b′ −a′
for planned profit

profit+Fc 30+30
Q= = = 40 units
b′ −a′ 2.25−0.75
9
❖ The IKon Company has the following cost
Fixed cost = Tk 100,000
Variable cost = Tk 4 per units
Sales price = Tk 4.50 per unit.
a) If company wants to earn a profit of 10% on its investment of Tk 500,000. How

many units of output it should produce and sell?
b) What will be its break even output and planned profit, tf it:
(i) Reduces its fixed cost to Tk, 90,000
(ii) Increasing its, sales price to Tk 5 per units
(iii) Reduces its variable cost by 10%
(iv) Reduce its sales price by 10%, increase its fixed cost by 10% and cuts its
variable cost by 10%.
Given, Fixed cost, F = 100,000
V.c,a = 4 per unit
Sales price b = 4.5 per unit
Unit of output profit and loss will be equal at
F 100000
Q1 = =
b−a 4.5 − 4
= 200,000 units.
10
Profit wanted = × 500000 = 𝑇𝑘 50000
100
10
Planned profit is achieved when,

F.c+Profit 100000+5000
Q= = =300,000 units. Ans:
b−a 4.5−4
b. (i) Reduces its Fixed Cost Tk 90000

F′
∴ Q′1 = Q1 ×
F
90000
= 200000× = 180000 units.
100000
F.C+profit 90000+50000
Planned profit = = = 280000 Ans:
b−a 4.5−4
Increasing its sales price Tk 5/units

(ii)
b′ =5
𝑏−𝑎 4.5−4
𝑄1′ = 𝑄1 = 200000 ×
𝑏′ −𝑎 5−4
= 100,000 unit Ans:

100000+50000
Planned profit = = 150,000 units Ans:
5−4
(iii) Reduced its variable cost by 10%

90
∴ v.c = a- × 4 = 𝑇𝑘3.6/𝑢𝑛𝑖𝑡
100
𝑏−𝑎 4.5−4
∴ 𝑄1′ = 𝑄1 = 200000 × = 111111.11 units
𝑏−𝑎′ 4.5−3.6
F.C+Profit 100000+50000
Planned profit = = = 166666.67 units Ans:
b−a′ 4.5−3.6
(iv)Reduce its sales price 10%
∴ b′ = 0.9 × 4.5 = Tk 4.05/unit

11
10
F ′ = F × (1+ )
100
= 1.1× 10000 = 110000
V.C, 𝑎′ = 0.9 × 4 or,

𝐹′ 11000
3.6 𝑄′ = 𝑄1 = 2𝑜𝑜𝑜𝑜𝑜 ×
𝐹 100000
= 220000
𝐹′ 𝑏−𝑎
∴𝑄= 𝑄 = 𝑄′ ×
𝑏′ −𝑎′ 𝑏′ −𝑎′
4.5−4
= 220000×
4.05−3.6
110000
= = 244444.44 units Ans:
4.05−3.6
= 244444.44 Ans:
F. C + profit
∴ planned profid =
b ′ − a′
110000+5000
=
4.05−3.6
Tk = 355555.55 Ans:
12
❖ Briefly describe about the economics of new design.
Manager of a company
Want to convert of old plant into the new plant
Thinking how the conversion is possible.
Considering factors to convert old design into new design:
i) why and how convert into new design (because cost are involved are
following)
a) design and engineering
b) production planning
c) purchase of new machine
d) change of plant layout.
ii) What is called then preparation or change over cost.
iii) What is the exception from it- increase profit sales .........
13
What is profit/volume (p/v) chart? Describe.
A profit/volume chart is a simplified form of breakeven chart or analysis which

develop the relationship between profit and volume. For profit, BEP and FC if any
two knows then other parameter is obtained by drawing chart.
A similar diagram to the breakeven chart called p/v chart is shown in figure.
Profit Area
0
P
BEP
} Profit = Z
Cost Area
Fixed
Fixed Cost = F
Figure: Profit/volume chart.
Where the fixed cost are marked as a negative quantity on the ordinate the BEP is
given by the intersection of the income line with the abscissa operation below the
abscissa occurs a loss, operation it, a profit.
Profit-volume ratio:
The profitability of the product is indicated by the slope of the income line called p/v
ratio and denoted by :
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑝𝑟𝑜𝑓𝑖𝑡
= =
𝑣𝑜𝑙𝑢𝑚𝑒 𝑎𝑡 𝐵𝐸𝑃 𝑉𝑜𝑙𝑢𝑚𝑒 (𝑎𝑡 𝑎𝑛𝑦 𝑝𝑜𝑖𝑛𝑡)
𝐹 𝐹+𝑍
Or,  = =
𝑄′ 𝑄
From break even chart, 𝐹 + 𝑎𝑄′ = 𝑏𝑄′

14
𝐹
=> =𝑏−𝑎
𝑄′
𝐹
=>  =
𝑄′
𝐹+𝑍
And for profit,  = =𝑏−𝑎
𝑄
𝐹 𝐹+𝑍
∴= = =𝑏−𝑎
𝑄′ 𝑄
Profit, 𝑍 = 𝑄(𝑏 − 𝑎) − 𝐹 = 𝑄 − 𝐹
Example:-
Unit produced = 20,000
Fixed cost (FC) = 50,000
Variable cost (VC/unit) = 6
Sales price (S.P/ unit) = 10
i) Draw p/v chart
ii) Determine:
a. BEP,
b. Margin of safety (i.e. Q-Q1)
Solution:
20,000 unit @ 10 = 2,00,000
V.C. @ 6 = 1,20,000
Profit = 80,000
FC = 50,000
Net profit = 30,000

15
𝑝 𝐹
i)  = 𝑣 𝑟𝑎𝑡𝑖𝑜 = 𝑣𝑜𝑙𝑢𝑒 𝑎𝑡 𝐵𝐸𝑃
𝐹 + 𝑝𝑟𝑜𝑓𝑖𝑡 50,000 + 30,000

= = = 0.4
𝑣𝑜𝑙𝑢𝑚𝑒 20,000 × 10
50,000
 = 0.4 = => 𝑄1 = 1,25,000 (𝑡𝑘)
𝑄1
1,25,000
𝑄1 = = 12,500 𝑢𝑛𝑖𝑡
10
Margin of safety = 𝑄 − 𝑄1 = 2,00,000 − 1,25,000 = 75,000 𝑡𝑘 = 7500 𝑢𝑛𝑖𝑡𝑠
❖ Derive the expression (mathematical) of the economics of a new design and also
discuss the effect of p/v ratio on the required market size of a new design.
or, discuss the effect of p/v ratio on the required market size of a new design.
Ans:
Know for old design; profit, 𝑍1 = 𝑄1 1 − 𝐹
Where, Z1= profit for old plant
1= p/v ratio for old plant
Q1= unit of quantity produced for old plant
The preparation costs and change over costs will have to be returned by the new
design, so for new design.
𝑍2 = 𝑄2 2 − 𝐹 − 𝑆
Where, Z2 = profit for new plant
2 = p/v ratio for new
Q2 = unit of quantity produced for new plant
S = change over cost.
It is assumed that fixed cost remains constant because there is no variation. If always
desirable that the profit of new plant more or at least equal than old plant.
16
i.e. Z2 ≥ Z1
=> Z2 − Z1 ≥ 0
=> Z2 2 − S − Z1 1 ≥ 0
∴ Z2 − Z1 = Z2 2 − S − Z1 1 + Z
Q1 1 + S
=> Q 2 ≥
2
S 1
=> Q 2 ≥ + Q
2 1 1
This condition tells us how many units should be produced for new design so that
same profit is returned as old design.
𝑄2 S 
=> ≥ + 1
𝑄1 2 Q 1 2
∴ 𝑍1 = 1 𝑄1 − 𝐹
z1 + F
=> 𝑄1 =
Q1
𝑄2 S 
∴ ≥ + 1
𝑄1 Z + F 2
2 1
1
𝑄2 S 
=> ≥ (1 + ) 1
𝑄1 Z1 + F 2
𝑄2 S Z1 + F + S
=> ≥ (1 + )D = ( )D
𝑄1 Z1 + F Z1 + F
𝑝
1 𝑣
𝑟𝑎𝑡𝑖𝑜 𝑜𝑓 𝑜𝑙𝑑 𝑝𝑙𝑎𝑛𝑡
Where, 𝐷 = = 𝑝
2 𝑟𝑎𝑡𝑖𝑜 𝑜𝑓 𝑛𝑒𝑤 𝑝𝑙𝑎𝑛𝑡
𝑣
1
When, p/v remain unchanged then, 𝐷 = 1 =
2
𝑄2 Z1 + F + S
=( ).1
𝑄1 Z1 + F
17
Equation (1) represents the mathematical expression of the economics of new

design.
Effect of p/v ratio:-
When, S= 4, Z1 = 4, F=2
𝑆 + 𝐹 + 𝑍1 4+2+4
∴ 𝑄2 = ( ) 𝑄1 = = 1.67𝑄1
𝐹 + 𝑍1 2+4
∴ 𝑄2 > 𝑄1
Suppose Q1=15, Q2 = 25, profit=?

25 4 + 𝑍2 + 4
∴ =
15 𝑍2 + 2
∴ 𝑍1 = 4
1
# if p/v ratio is reduced for new design. i.e. >1
2
1
# if p/v ratio is increased for new design. i.e. <1
2
Suppose Z1=4, S=4, F=2, 1=2, 2=1
𝑄2 Z1 + F + S 
∴ ≥( )× 1
𝑄1 Z1 + F 2
𝑄2 4+2+4 2
∴ ≥( )×
𝑄1 4+2 1
10
=> 𝑄2 ≥ 𝑄
3 1
If Z1=4, S=4, F=2, 1=2, 2=4
𝑄2 4+2+4 2
∴ ≥( )×
𝑄1 4+2 4
5
=> 𝑄2 ≥ 𝑄
6 1
18
𝑄2 S 
R.Q. Prove that
𝑄1
≥ (1 +
Z1 +F
) × 1, when 1= 2 explain with example.
2
❖ The annual Fixed cost of a product are known to be $ 200,000 and the annual net profit
$40,000 the average monthly sales being 820 units. A new design completed involving
an expenditure amounting to $ 80,000 to be returned in two years. It is expected that
new production method the p/v ratio may be increase by 5%, what should the annual
sales figure for the new design be so that same net profit will be realized.
Solution:
1 1
Here, 𝐷 = = = 0.95
2 1.05
$ 80,000
𝑆= = $ 40,000
2
F=$200,000, Z1=$ 40,000
𝑄2 Z1 +F+S
We know, ≥( )D =
𝑄1 Z1 +F
40,000+200,000+40,000
( ) × 0.95
40,000+200,000
𝑄2
=> ≥ 1.11
𝑄1
=> 𝑄2 ≥ 1.11Q1 =
1.11 × (12 × 820) = 10820 units
Relative profitability under condition of high or low demands

19
AB Ltd CD Ltd
Sales Tk. 150,000 Sales Tk. 150,000
VC Tk. 120,000 VC Tk. 120,000
FC Tk. 15,000 FC Tk. 35,000
Profit Tk. 15,000 Profit Tk. 15,000
SOLUTION:
𝐹𝐶 𝐹𝐶 + 𝑃𝑟𝑜𝑓𝑖𝑡
= =
𝑠𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑎𝑡 𝐵𝐸𝑃 𝑠𝑎𝑙𝑒𝑠
For AB Ltd;
15,000 + 15,000
= = 0.2
150,000
𝐹𝐶 15,000
∴ 𝑆𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑎𝑡 𝐵𝐸𝑃 = = = 75,000 𝑡𝑘
 0.2
For CD Ltd;
35,000 + 15,000
= = 0.33
150,000
𝐹𝐶 35,000
∴ 𝑆𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑎𝑡 𝐵𝐸𝑃 = = = 105,000 𝑡𝑘
 0.33
∴ When consider high demand CD Ltd is more profitable than AB Ltd.

20
Profit Area
Sales
Profit for Profit for
AB Ltd Profit CD Ltd AB Ltd
15,000 75,000 1,05,000 1,50,000
15,000
Cost Area
CD Ltd
Fixed
35,000
F = 50,000
❖ Write down the procedure for drawing of multi- product break even chart?
Ans.
i) Calculate p/v ratio for each product and the products in descending order
on the basis of p/v ratio.
ii) X-axis represents sales value while Y-axis represents contribution of fixed
cost.
iii) Plot the total Fixed cost line.
iv) Take the product having the highest p/v ratio and plot its contribution
against sales then take the product having 2nd highest p/v ratio and plot
cumulative contribution against cumulative sales. The process will end
with plotting by the product having the lowest p/v ratio.
v) Obtain the average contribution slope by joining the origin to the end of
the last line plotted the BEP is the point of intersection of average
contribution.
21
❖ The breakeven point of a product occurs at a sales income of $120,000, but normally
the sales income is $180,000, the fixed costs being $100,000. A new product involved
additional costs old $20,000 but the p/v ratio was improved by 20 per cent and sales
income increased to $240,000. What net profit did the new design yield?
SOLUTION:
Given:
For old plant, For new plant,
𝑄1′ (𝐵𝐸𝑃) = $120,000 S=$20,000
𝑄1 = $180,000 F=$100,000
F=$100,000 𝑄2 = $240,000
2 = 1.2 1 , Net Profit=?

𝐹 100,000 5
When, 1 = = =
𝑄1′ 120,000 6
∴ 2 = 1.2 1 = 1
But,
𝐹 + 𝑍1
1 = ,
𝑄1
5
𝑧1 = × 180,000 − 100,000 = $50,000
6
𝐹 + 𝑆 + 𝑍2
2 = ,
𝑄2
𝑍2 = 1 × 240,000 − 100,000 − 20,000 = $120,000
∴ 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑍2 − 𝑍1 = 120,000 − 50,000 = $70,000 (Ans.)

22
Practical Problems
(with solutions)
23
1. A beverage company produces a single article. Following cost data is given
about its product:‐
Selling price per unit Tk.40
Marginal cost per unit Tk.24
Fixed cost per annum Tk.16000
Calculate:
(a) P/V ratio (b) break even sales (c) sales to earn a profit of Tk. 2,000 (d)
Profit at sales of Tk. 60,000 (e) New break-even sales, if price is reduced by 10%.
Solution:
We know that (S‐v) /S= F + P OR s x P/V Ratio = Contribution
So, (A) P/V Ratio = Contribution/sales x 100
= (40‐24)/40 x 100 = 16/40 x 100 OR 40%
(B) Break even sales

S x P/V Ratio = Fixed Cost
(At break even sales, contribution is equal to fixed
cost)Putting this values: s x 40/100 = 16,000
S = 16,000 x 100 / 40 = 40,000 OR 1000 units
(C) The sales to earn a profit of Tk. 2,000

Sx=F+P
Putting these values: s x 40/100 = 16000
+ 2000 S = 18,000 x 100/40
S = Tk. 45,000 OR 1125 units
(D)Profit at sales of 60,000

S x P/ = F + P
Putting these values: Tk. 60,000 x 40/100 =
16000 + P24,000 = 16000 + P
24,000 – 16,000 = P
8,000
(E) New break-even sales, if sale price is reduced

by10% New sales price = 40‐10% = 40‐4 = 36
Marginal cost = Tk. 24
Contribution = Tk. 12
P/V Ratio () = Contribution/Sales
= 12/36 x100 OR 33.33%
Now, s x P/V Ratio = F (at B.E.P. contribution is equal to fixed
cost) S x 100/300 = Tk.16000
S = 16000 x 300/100
S= Tk.48,000.
24
2. From the following information's find out:

a. P/V Ratio
b. Sales &
c. Margin of Safety
Fixed Cost = Tk.40, 000
Profit = Tk. 20,000
B.E.S. = Tk. 80,000
Solution:
a. P/V Ratio.
We know that S – V = F + P
B.E.S. x  = F (Value of P is zero at BE Sales) OR  = F/BES
Putting the value,

 = 40,000/80,000 = 50/100 OR 50%
b. Sales.
We know that Sales x  = F+ P OR Sales x  = Contribution
OR, Sales = Contribution /
So, = (40,000 + 20,000)/50/100
= (60,000 x 100)/50
=Tk.1, 20,000
c. Margin of Safety.
Margin of Safety = Sales – B.E.P Sales So, MOS = 1, 20,000 – 80,000
MOS = Tk.40, 000
3. A company manufactures a single product having a marginal cost of Tk. 1.50 per
unit.
Fixed cost is Tk. 30,000 per annum. The market is such that up to 40,000 units can be
sold at a price of Tk. 3.00 per unit, but any additional sale must be made at Tk.
2.00 per unit. Company has a planned profit of Tk. 50,000. How many units must be
made and sold?
Solution:
a. Contribution desired = Fixed cost + Desired Profit
= 30,000 + 50,000 = 80,000
b. Calculation of contribution by producing 40,000 units.
Contribution per unit = Selling price – Marginal cost
= 3.00 – 1.50
= 1.50
c. Contribution for producing 40,000 units.
= 1.50 x 40,000 units
= Tk.60, 000
d. Additional units to be produced and sold at Tk. 2.00 per unit after 40,000 units.
=Tk.80, 000 –Tk. 60, 00 = Tk.20, 000
25
e. Units to be produced for contribution of Tk. 20, 000 after change in price.
Contribution per unit = Tk. 2.00 – Tk. 1.50 = Tk. 0.50
f. Additional units to be produced for contribution of Tk. 20, 000.
= (20, 000 x 100)/50 = 40, 000 units.
Total units to be produced to earn planned profit = 40, 000 + 40, 000 = 80, 000 units.
4. Mitanshi & company manufacture three products. The following is the cost data
relating to products A, B, and C.
Products A B C Total
Tk. Tk. Tk. Tk.
Sales 1, 50, 000 90, 000 60, 000 3, 00, 000
Variable Cost 1, 20, 000 63, 000 36, 000 2, 19, 000
Contribution 30, 000 27, 000 24, 000 81, 000
Fixed Cost 13, 500 13, 500 13, 500 40, 500
Profit 40, 500
Prove that how knowledge of marginal costing can help management in changing the
sales mix in order to increase profit of the company.
Solution: Let’s find out relative profitability so that we can compare it later on.
Tk. Tk. Tk. Tk.
Sales 1, 50, 000 90, 000 60, 000 3, 00, 000
Variable Cost 1, 20, 000 63, 000 36, 000 2, 19, 000
Contribution 30, 000 27, 000 24, 000 81, 000
Fixed Cost 13, 500 13, 500 13, 500 40, 500
Profit 16, 500 13, 500 10, 500 40, 500
P/V Ratio 20% 30% 40% 27%
From the above table it is clear that with the comparison of product B and C, A is
less profitable. Keeping total production same, company should change the sales
mix in a way that emphasis should be on producing product C and B.
Now assume that the company decides to use its production capacity more for
product B and C than A. Let’s see the effect on profit if sale of product B and C is
increased by Tk. 30, 000 each and product A by reducing Tk. 60, 000.
Tk. Tk. Tk. Tk.
Sales 90, 000 1, 20, 000 90, 000 3, 00, 000
Variable Cost 72, 000 84, 000 54, 000 2, 10, 000
Contribution 18, 000 36, 000 36, 000 90, 000
Fixed Cost 13, 500 13, 500 13, 500 40, 500
Profit 49, 500
From the above table, we can observe that proposed change in product mix leads toan
increase in profit from Tk.40, 500 to Tk. 49, 500.
26
5. A company has a machine No. 9 which can produce either product A or B. The cost
data relating to machine A and B are as follows:
Particulars Product Product B

A
Selling price Tk. 20.00 Tk. 30.00
Variable expenses Tk. 14.00 Tk. 18.00
Contribution Tk. 6.00 Tk. 12.00
Additional Information:
a. Capacity of machine No. 9 is 1, 000 hrs.
b. In one hrs. machine No. 9 can produce 3 units of A and 1 unit of
B. Which product should machine No. 9 produced?
Solution:
Statement showing contribution per hour for machine No. 9
Particulars Product Product

A B
Sales 20.00 30.00
Variable expenses 14.00 18.00
Contribution per unit 6 12
Contribution per hour 18.00 12.00
Contribution per 1,000 units 18, 000 12, 000
From the above table we can see that company should produce product A with the
help of machine No. 9.
6. Meet & company Ltd. has three divisions each of which makes a different product.
The budgeted data for the next year is as follows:
Divisions A B C
Tk. Tk. Tk.
Sales 1, 12, 000 56, 000 84, 000
Direct material 14, 000 7, 000 14, 000
Direct labor 5, 600 7, 000 22, 400
Variable overhead 14, 000 7, 000 28, 000
Fixed cost 28, 000 14, 000 28, 000
Total cost 61, 600 35, 000 92, 400
The management is considering closing down division C. There is no possibility of
reducing variable costs. Advice whether or not division C should be closed down.
27
Solution:
Marginal Cost Statement
Division A B C
Tk. Rs, Tk.
Sales 1, 12, 000 56, 000 84, 000
Marginal cost 33, 600 21, 000 64, 400
(Direct material + Direct cost
+Variable overheads)
Contribution 78, 400 35, 000 19, 600
Fixed cost 28, 000 14, 000 28, 000
Profit 50, 400 21, 000 (8, 400)
7. Cost data for last year:

Sales ‐ 60, 00, 000 (Operating at 75% capacity)
Marginal cost (50% of sale) ‐ 30, 00, 000
Contribution ‐ 30, 00, 000
Fixed cost ‐ 20, 00, 000
Profit ‐ 10, 00, 000
Percentage of profit over sales ‐ 16.7%
A report on the performance for the year states:
Sales ‐ 80, 00, 000
Profit ‐ 16, 00, 000
Percentage on profit on sale ‐ 20%
Should the performance of current year be commended? What option should be
conveyed to the managing director on the basis of the Cost ‐ Volume ‐ Profit
analysis?
Solution:
Statement showing profit for last year and profit at a sale of Tk. 80, 00, 000
Particulars Last year performance Performance in present

75% capacity activity level, i.e., 100%
Tk Tk.
.
Sales 60, 00, 000 80, 00, 000
Marginal cost 30, 00, 000 40, 00, 000
(50% of sales)
Contribution 30, 00, 000 40, 00, 000
Fixed cost 20, 00, 000 20, 00, 000
Profit 10, 00, 000 20, 00, 000
28
From the above table we can say that result of current year’s performance is not
commendable because profit should have been 25% of sales after operating at 100%
capacity, whereas it is only 20% of sales.
8. The following budget has been prepared at 70% level of home market:
Units ‐ 4, 200
Wages ‐ 12, 600
Materials ‐ 21, 000
Fixed cost ‐ 7, 000
Variables cost ‐ 2, 100
Total ‐ 42, 700
The selling price in Bangladesh is Tk. 15. In Sri Lanka about 800 units may be sold
only at Tk. 10 and in addition 25 paise per unit will be expenses as freight etc., Do
you advisetrying for the market in the Sri Lanka?
Solution:
Particulars Bangladesh Sri Lanka Total

(4200 units) (800 units) (5000 units)
Tk. Tk Tk.
.
Sales (units x price) (A) 63, 000 8, 000 71, 000
Materials (Tk. 5 per unit) 21, 000 4, 000 25, 000
Wages (Tk. 3 per unit) 12, 600 2, 400 15, 000
Variables (Tk. 0.50 per unit) 2, 100 400 2, 500
Freight (Only for Sri Lanka Tk. 0.25 per unit) ‐‐‐‐‐‐‐‐‐‐‐ 200 200
Marginal cost (B) 35, 700 7, 000 42, 700
Contribution (A – B) 27, 300 1, 000 28, 300
Less: Fixed cost 7, 000 ‐‐‐‐‐‐‐‐‐ 7, 000
20, 300 1, 000 21, 300
Suggestion: It is advisable to try for the Sri Lankan market at Tk. 10 per unit as by
doing so there is an increase of Tk. 1000.
9. Asian paints manufacture 1,000 tins of paints when working at normal capacity. It
incurs the cost of Tk. 16 in manufacturing one unit. The details of this cost are given
below:
Particulars Tk.
Direct material 7.50
Direct labor 2.00
Variable overheads 2.50
Production cost (per unit) 12.00
Fixed cost (for 12month) 40000
Each unit of product is sold for Tk. 20 with variable selling and administrative
expenses of Tk. 0.50 per unit of production.
29
During the next 3 months, only 500 units can be produced and sold. Management
plans to close down the factory estimating that the unavoidable fixed cost Tk. 2, 000
for the quarter.
When the plant is operating, the fixed overhead costs are incurred at a uniform rate
throughout the year. Additional cost of plant shut down for the three month is
estimated at Tk. 2, 800.
Express your view whether the plant should be shut down for three months, and
calculate the shutdown point for three months in units of products.
Solution:
(A) Statement showing Contribution per unit:
Particulars Per unit

Tk.
Direct material 7.50
Direct labor 2.00
Variable overheads 2.50
Variable selling and 0.50
administrative expenses
Marginal cost (Total) (A) 12.50
Sales (B) 20.00
Contribution (A – B) 7.50
(B) Computation of Loss, if the plant is operated:
500 units to be produced:
Contribution on 500 units: 500 x Tk. 7.50 = Tk. 3, 750
Fixed cost for three months: 40, 000 x 3/12 = Tk. 10, 000
Expected cost on Operation: (Contribution – Fixed cost) = Tk. 6, 250
(C) Computation of loss, if the plant is shut down:
Unfavorable Fixed cost = Tk. 2, 000
Additional cost of Shut down = Tk. 2, 800
Total loss on shut down = Tk. 4, 800
(D)Advise: From the above calculation, it is clear that it is in the interest of
company to shut down.
(E) Calculation of shut down point:
Avoidable fixed cost for the period
= Total fixed costs for the period – unavoidable fixed cost ‐ additional cost for
shut down
= Tk. 10, 000 – Tk.2, 000 – Tk. 2, 800
= Tk. 5, 200
Shut down point = Avoidable fixed cost / Contribution per unit
= 5, 200 / 7.50 = 693 units.
30
10. A company is providing its product to the consumer through the wholesalers. The
managing director of the company thinks that if the company starts selling through
retailers or to the consumers directly, it can increase its sales, charge higher prices
and make more profit.
On the basis of the following information, advise the managing director whether the
company should change its channel of distribution or not:
Particulars Wholesaler Retailer Consumer

Tk. Tk. Tk.
Sales per unit 3.60 5.25 6.00
Estimated Sales per year (units) 1, 00, 000 1, 20, 000 1, 80, 000
Selling and distribution overheads 0.40 1.00 1.50
(per unit)
Cost of production: Variable cost Tk. 2.50 per unit, Fixed cost Tk. 50, 000.
Solution:
Statement of profit
Particulars Wholesaler Retailers Consumers
Tk. Tk. Tk.
No. of unit sold 1, 00, 000 1, 20, 000 1, 80, 000
Sales revenue (unit x 3, 60, 000 6, 30, 000 10, 80, 000
price) (A)
Variable cost 2, 50, 000 3, 00, 000 4, 50, 000
Selling and distribution 40, 000 1, 20, 000 2, 70, 000
overheads
Marginal cost (B) 2, 90, 000 4, 20, 000 7, 20, 000
Contribution (A – B) 70, 000 2, 10, 000 3, 60, 000
Less: Fixed cost 50, 000 50, 000 50, 000
Profit (Contribution – 20, 000 1, 60, 000 3, 10, 000
Fixed cost)
Advise: Sales should be made directly to the consumers as this channel contributes
higher profit.
11. The cost analysis of two products A and B is given below:

Particulars Product A Product B
Tk. Tk.
Material Tk. 2.50 per unit 25 45
Labor @ Tk. 1 per hour 12 ‐‐‐
Labor @ Tk. 1.50 per hour ‐‐‐ 15
Variable overheads 2 5
Selling price 70 80
31
On the basis of above information, which product would you recommend to be
manufactured if labor is key factor and if material is key factor?
Solution:
Here first of all we have to find out contribution on the basis of both, material as a key
factor and labor as a key factor.
Statement showing marginal cost and contribution
Particulars Product A Product B
Tk. Tk.
Selling price(A) 70 80
Material 25 45
Labor 12 15
Overheads 2 5
Marginal cost (B) 39 65
Contribution (A – B) 31 15
Contribution per unit of 31/10 units = 3.10 15/18 = 0.83
Material (25 units/ 2.50 = 10 units) (45 units/ 2.50 = 18 units)
Contribution per labor 0.258 1.50
Hour (31/12 hrs) (15/10 hrs)
Advise: If labor is key factor then product B and if material is key factor then product A
should be produced.
12. A manufacturer produces 1500 units of products annually. The marginal cost of each
product is Tk. 960 and the product is sold for Tk. 1200. Fixed cost incurred by the
company is Tk. 48, 000 annually. Calculate P/V Ratio and what would be the break ‐
even point in terms of output and in terms of sales value?
Solution:
A. Contribution per unit = Sales – Variable cost = Tk. 1200 – Tk. 960 = Tk. 240
B. P/V Ratio = Contribution / Sales x 100 = 240/1200 x 100 = 20%
C. Break‐even point (in units) = Fixed cost / Contribution per unit =
=48, 000 /240 = 200 units
D. Break‐even point (in Tk.) = Break‐even point x selling price per unit
= 200 x 1200 = 2, 40, 000
OR
D. Break‐even point (in Tk.) = Fixed cost / P/V Ratio
= 48, 000 / 20% = 2, 40, 000
13. From the following data calculate Margin of Safety.

Particulars Tk.
Sales 15, 00, 000
Fixed expenses 4, 50, 000
Profit 3, 00, 000
32
Solution:
P/V Ratio = Fixed expenses + Profit / Sales x 100
= Tk. 4, 50, 000 + 3, 00, 000 / 15, 00, 000 x 100
= 7, 50, 000 / 15, 00, 000 x 100
= 50%
Margin of Safety = Profit / P/V Ratio
= 3, 00, 000 / 50%
= 6, 00, 000
14. Following data is of Dev manufacturing company.

Costs Variable cost Fixed cost
(% of Sales) Tk.
Direct materials 23.8
Direct labor 18.4
Factory overheads 21.6 37, 980
Distribution expenses 4.1 11, 680
General & administrative expenses 11.1 13, 340
Budgeted sales for the next year are Tk. 3, 70, 000.
Calculate the followings:
The sales required to break even.
Profit at the budgeted sales volume
The profit, if actual sales – A. Increases by 5 % from the budgeted sales and B. Drop
by 10% from the budgeted sales.
Solution:
A. Variable cost = 23.8 + 18.4 + 21.6+4.1+11.1 = 79% (of sales)
So, it will be 79% of sales = 3, 70, 000 x 79 / 100 = 2, 92, 300
B. Fixed cost = Tk. 37,980 + Tk. 11, 680 + Tk. 13, 340 = 63, 000
C. Contribution = 100 – 79 = 21%
D. P/V Ratio = Contribution / Sales x 100
= 21 / 100 x 100 = 21%
Break‐even point = Fixed cost / P/V Ratio
= 63, 000 / 21%
= Tk. 3, 00, 000
Profit at budgeted sales of Tk. 3, 70,
000 Contribution = Sales x P/V Ratio
= 3, 70, 000 x 21%
= Tk. 77, 700
Contribution = Fixed expenses + Profit
So, Profit = Contribution – Fixed expenses
= Tk. 77, 700 – 63, 000
= Tk. 14, 700
33
Profit if actual sales increased by 5% from the budgeted sales.
Particulars Tk.
Sales 3, 70, 000
Add: 5% increase on Tk.3, 70, 000 18, 500
Revised sales 3, 88, 500
Less: Variable cost 79% of Tk. 3, 3, 06, 915
88,
500
Contribution 81, 585
Less: Fixed cost 63, 000
Profit 18, 585
Profit if actual sales dropped by 10%
Particulars Tk.
Sales 3, 70, 000
Less: 10 % decrease on Tk. 3, 70, 000 37, 000
Revised sales 3, 33, 000
Less: Variable cost 79% of 3, 33, 000 2, 63, 070
Contribution 69, 930
Fixed cost 63, 000
Profit 6, 930
15. Gyan limited manufactures and sells four types of products under the brand names A,
B, C, and D. The sales mix in value comprises 30%, 40%, 20%, and 10% of A, B, C,
and D respectively. The total budgeted sales are Tk. 60, 000 per month. The
operating costs are:
Product A ‐ 60% of selling price
Product B ‐ 70% of selling price
Product C ‐ 80% of selling price
Product D ‐ 70% of selling price
Fixed cost Tk. 12, 000 per month. Calculate the break‐even point and percentage of
margin of safety for the product on overall basis.
Solution:
Calculation of Sales Mix
Products
A B C D Total
Particulars 30% 40% 20% 10% 100%
Tk. Tk. Tk. Tk. Tk.
Sales 18, 000 24, 000 12, 000 6, 000 60, 000
Less: Variable cost 10, 800 16, 800 9, 600 4, 200 41, 400
Contribution 7, 200 7, 200 2, 400 1, 800 18, 600
Less: Fixed cost 12, 000
Profit 6, 600
34
P/V Ratio = Contribution / Sales x 100
= 18, 600 / 60, 000 x 100
= 31%
Break‐even point = Fixed cost / P/V Ratio
= 12, 000 / 31%
= 38, 709
Margin of safety = Actual sales – Break‐even point / Actual sales x 100
= 60, 000 – 38, 709 / 60, 000 x 100
= 35.48%
16. From the following information, calculate Break‐even point and Sales to earn profit
of Tk. 2, 40, 000.
Particulars Tk.
Sales 8, 00, 000
Fixed cost 3, 60, 000
Variable cost 5, 60,000
Solution:
Contribution = Sales – Variable cost
= 8, 00, 000 – 5, 60, 000
= 2, 40, 000
P/V Ratio = Contribution / Sales x 100
= 2, 40, 000 / 8, 00, 000 x 100
= 30%
Sales to earn a profit of Tk. 2, 40, 000
= Fixed cost + Desired Profit / P/V Ratio
= 3, 60, 000 + 2, 40, 000 / 30%
= 6, 00, 00 / 30%
= 20, 00, 000
17. From the information given below, calculate P/V Ration, Fixed expenses, Expected
profit if sales is budgeted at Tk. 90, 000.
Year sales Profit
2004 1, 80, 000 30, 000
2005 2, 60, 000 50, 000
Solution:
P/V Ratio = (Change in profit Tk. / Change in sales Tk.) x 100
= 50, 000 – 30, 000 / 2, 60, 000 – 1, 80, 000 x 100
= 20, 000 / 80, 000 x 100
= 25%
Contribution = S x P/V Ratio
= 1, 80, 000 x 25%
= 45, 000
35
Fixed cost = Contribution = F + Profit
= 45, 000 = F + 30, 000
= F = 45, 000 – 30, 000
= F = 15, 000
When sales is budgeted as Tk. 90,
000 Contribution = Sales x P/V
Ration
= 90, 000 x 25 / 100
= 22, 500
Profit = Contribution – Fixed cost
= 22, 500 – 15, 000= 7, 500
18. The budgeted results of Dev limited company include the following:
Products Sales volume P/V
Tk. Ratio
A 2, 00, 000 40%
B 1, 20, 000 50%
C 80, 000 25%
Total 4,00, 000 30%
Fixed overheads for the period are Tk. 80, 000. The management is very much
concerned at the result forecasts for the company. They have requested you to
prepare a statement showing the amount of loss expected and recommend a change
in sales mix which will eliminate the expected loss.
Solution:
A. Contribution = 4, 00, 000 x 30 / 100 = 1, 20,
000 Loss = Contribution – Fixed cost
= 1, 20, 000 – 80, 000
= 40, 000
B. Recommended change in sales mix:
Under recovery of fixed cost or Loss / P/V Ratio of the

productProduct A = 40, 000 / 40%
= 1, 00, 000
Product B = 40, 000 / 50%
= 80, 000
Product C = 40, 000 / 25%
= 1, 60, 000
C. Increase in total sale to eliminate loss of Tk. 40, 000:
= Expected Loss / Composite P/V Ratio
= 40, 000 / 30%
= 1, 33, 334
36
19. Use the following information and explain that
how the reduction in selling price would affect
the margin of safety?
Particulars Tk. Tk.
Selling price per unit ‐‐‐‐‐‐ 40
‐
Variable cost
Material 12 ‐‐‐‐‐
Labor 8 ‐‐‐‐‐
Overheads 4 24
Fixed cost is Tk. 8, 000.
Full capacity of the Plant is 5, 000
units. Reduced selling price is Tk. 32
per unit.
Solution:
1. When selling price is Tk. 40, then Margin of
Safety: MOS = Total sales – Sales at B.E.P.
So, first of all we have to calculate Total sales and Sales at B.E.P.
A. Total Sales = Total units x Sales price per unit

= 5, 000 x 40
= 2, 00, 000
B. Sales at B.E.P. = Fixed cost x Price / Price – Variable cost

= 8, 000 x 40 / 40 – 24
= 3, 20, 000 / 16
= 20, 000
From the above information now we can calculate Margin of Safety by the following
way:
Margin of Safety = Total sales – Sales at B.E.P.
= 2, 00, 000 – 20, 000
= 1, 80, 000
2. Margin of Safety when reduced selling price is Tk. 32:

B.E.P. = Fixed cost x Price / Price – Variable cost
= 8, 000 x 32 / 32 – 24
= 8, 000 x 32 / 8
= 32, 000
Margin of Safety = 1, 80, 000 – 32, 000
Margin of Safety = 1, 48, 000
3. Impact: From the above calculation we can see that the reduced price will decrease
margin of safety and B.E.P. will increase.
37
PLANT LOCATION AND

LAYOUT
38
39
LOCATIONAL ANALYSIS 40
Comparative Costs of Alternative Locations
41
The above cost statement indicates that site B is preferable to site A keeping in
mind economic considerations only although in some respects site A has lower
costs. By applying the definition of ideal location which is the place of
maximum net advantage or which gives lowest unit cost of production and
distribution, site B would be preferred.
42
Factors Affecting Location Decision
43
Factors Affecting Location Decision
44
• From the discussion above, we have already learnt

that location of a plant is an important
entrepreneurial decision because it influences the
cost of production and distribution to a great
extent.
• In some cases, you will find that location may
contribute to even 10% of cost of manufacturing
and marketing.
• Therefore, an appropriate location is essential to
the efficient and economical working of a plant.
• A firm may fail due to bad location or its growth and
efficiency may be restricted.
45
46
47
48
49
50
51
PROCESS LAYOUT 52
53
54
55
56
57
58
1. Two Layout A and B alternative are shown in below. The facility product
travel between department and distance between departments for each
layout alternative. Find out which layout is suitable?
Department Distance between

movement departments (ft)
combination Layout A Layout B
1-5 30 30
1-7 10 10
1-9 10 10
1-10 10 10
2-5 10 15
2-6 20 20
2-10 10 10
3-6 40 10
3-9 30 20
4-5 30 30
4-7 10 10
4-10 10 10
5-6 10 10
6-9 10 10
7-8 20 50
8-10 20 30
Solution:
Product Dept. Process No. of Layout A Layout B
Sequence Product
a 1 – 5 – 4 – 10 1000 1000(30 +30+10) = 70000 1000(30 +30+10) = 70000
b 2–6–3–9 2000 2000(20 +40+30) = 180000 2000(20 +10+20) = 100000
c 2 – 10 – 1 – 9 3000 3000(10 +10+10) = 90000 3000(10 +10+10) = 90000
d 1 – 7 – 8 – 10 1000 1000(10 +20+20) = 50000 1000(10 +50+30) = 90000
e 2–5–6–9 2000 2000(10 +10+10) = 60000 2000(15 +10+10) = 70000
f 1 – 7 – 4 – 10 4000 4000(10 +10+10) = 120000 4000(10 +10+10) = 120000
Total = 570000 ft Total = 540000 ft
Since the value of layout B is less than the layout A. So, layout B is
suitable
59
2. The yellow bird factory is adding a new wing to its building to manufacture a new product line with five
models a, b, c, d, and e. Two layout alternatives are shown below
Layout A Layout B
1 2 5 4 5 6
4 6 3 1 2 3
The new wing models, their movements through six departments and distances between departments are shown
in the table below:
Department movement Distance between

combination departments (ft)
Layout A Layout B
1–2 10 10
2–3 25 15
2–5 15 15
2–6 10 30
3–4 25 35
3–5 10 20
4–5 35 15
5–6 25 15
Product Product Model No. of

Processing path Product
a 4–5–6 5000
b 1– 2 – 3 5000
c 1– 2 – 6 4000
d 1–2–5 2000
e 3–4–6 4000
Solution:
Product Product Model No. of Layout A Layout B
Processing path Product
a 4–5–6 5000 5000 ( + + )= 5000 ( + + )=
b 1– 2 – 3 5000 5000 ( + + )= 5000 ( + + )=
c 1– 2 – 6 4000 4000 ( + + )= 4000 ( + + )=
d 1–2–5 2000 2000 ( + + )= 2000 ( + + )=
e 3–4–6 4000 4000 ( + + )= 4000 ( + + )=
Total = Total =
60
ME 4201: PRODUCTION PLANNING AND CONTROL
PRODUCT AND PRODUCTION

SYSTEM
Md. Akibul Islam
A s s i s t a n t P r o f e s s o r, D e p a r t m en t
of Mechanical Engineering
D H A K A U N I V E R S I T Y O F E N G I N E E R I N G & T E C H N O L O G Y, 1
GAZIPUR
CONTENT
61
• Product and Production

• Production System
• Classification of Production System
• Production Management
• Objectives of Production
Management
Dhaka University of Engineering & Technology, Gazipur-1707 2/16

Product and Production
62
Product
• A product is the item offered for sale.
• A product can be a service or an item. It can be physical or in virtual
or cyber form.
• Every product is made at a cost and each is sold at a price. The price
that can be charged depends on the market, the quality, the marketing
and the segment that is targeted.
• Each product has a useful life after which it needs replacement, and a
life cycle after which it has to be re-invented.

Product and Production
63
Production
• Production is defined as “the step-by-step conversion of one form of
material into another form through chemical or mechanical
process to create or enhance the utility of the product to the user.”
• Thus production is a value addition process. At each stage of
processing, there will be value addition.
• Edwood Buffa defines production as ‘a process by which goods and
services are created’.

Production System
64
• The production system of an organization is that part, which produces products of an

organization. It is that activity whereby resources, flowing within a defined system, are
combined and transformed in a controlled manner to add value in accordance with the
policies communicated by management.

Classification of Production System
65
• Production systems can be classified as Job Shop, Batch, Mass and Continuous
Production systems.

66
JOB SHOP PRODUCTION

• Job shop production are characterised by manufacturing of one or few quantity of
products designed and produced as per the specification of customers within prefixed
time and cost.
• A job shop comprises of general purpose machines arranged into different departments.
Each job demands unique technological requirements, demands processing on machines in a
certain sequence.

67
JOB SHOP PRODUCTION

68
BATCH PRODUCTION

69
BATCH PRODUCTION
10/1
Dhaka University of Engineering & Technology, Gazipur-1707
70
MASS PRODUCTION
Mass production is defined as the manufacturing of goods on a large scale without compromising on
the quality. This production system is justified by very large volume of production. The machines are
arranged in a line or product layout. Product and process standardization exists and all outputs follow
the same path.
11/1
71
MASS PRODUCTION
12/1
72
CONTINUOUS PRODUCTION
13/1
73
CONTINUOUS PRODUCTION
14/1
Product Management
74
• Production management is a process of planning, organizing, directing and

controlling the activities of the production function. It combines and transforms
various resources used in the production subsystem of the organization into value
added product in a controlled manner as per the policies of the organization.
• E.S. Buffa defines production management as, “Production management deals

with decision making related to production processes so that the resulting goods or
services are produced according to specifications, in the amount and by the
schedule demanded and out of minimum cost.”
15/1
Objectives of Production Management
75
The objective of the production management is ‘to produce goods services of right quality and quantity at the
right time and right manufacturing cost’
16/1
76

77
ENGINEERING ECONOMY
Worth of money will be changed with time. For example
2001…………………………………………..94.35Tk
2002…………………………………………..100.00Tk
2003…………………………………………..100+100*6/100=106 Tk (For 6% interest)
Cash flow diagram:
Pw Fw
Aw
i = given, n = given
1 2 3 4 5 6
Where,
Pw=Present worth
Aw=Annual worth
Fw=Future worth
i= interest rate
n= number of years
𝐹1 = 𝑝 + 𝑖𝑝 = 𝑝(1 + 𝑖)
𝐹2 = 𝐹1 + 𝑖𝐹1 = 𝐹1 (1 + 𝑖) = 𝑝(1 + 𝑖)2
………………………………………………
……………………………………………..
𝐹𝑛 = 𝑝(1 + 𝑖)𝑛 (1)
𝑝 = 𝐹/ (1 + 𝑖)𝑛
𝑖(1+𝑖)𝑛
𝐴 = 𝑝[(1+𝑖)𝑛 −1 ] (2)
𝑖
𝐴 = 𝐹[(1+𝑖)𝑛 −1 ] (3)
Page | 1
78
Problem 1: A small aerospace company is evaluating the purchase of an automatic feed machine and a
manual feed machine for a product finishing process. The auto feed machine has an initial cost of Tk. 23000
and estimated salvage value of Tk. 4000 and a predicted life of 10 years. One person will operate the
machine at a cost of Tk. 12 an hour. Annual maintenance and operating cost are expected to be Tk. 3500
for output 8 tons per hour. The alternative manual feed machine has a first cost of Tk. 8000, no expected
salvage value a 5 years life and an output of 6 tons per hour. However, 3 workers will be required at Tk.8
an hour each. The machine will have an annual maintenance and operation cost of Tk. 1500. All invested
capital is expected to generate a market return of 10% per year.
(a) How many tons per year must be finished in order to satisfy the higher purchase cost of auto feed
machine?
(b) If a requirement to finish 2000 tons per year is anticipated, which machine will should be purchased.
Solution:
Auto feed machine Manual feed machine
1. Initial cost Tk. 23000 Tk. 8000

2. Salvage value Tk. 4000 Tk. 000
3. Annual maintenance cost TK. 3500 Tk. 1500
4. Life time 10 yrs 5 yrs
i=10%
(a) Let x represents the number of tons per year to finish.
Pw =23,000 Fw = 4,000
Aw = 3,500
1 2 3 4 5 6 7 8 9 10
Variable cost for auto feed machine
V.C= (Tk.12/hr)*(hr/8 tons)*(x tons/yr)=1.5x/yr
Variable cost for manual feed machine
V.C= (Tk. 8/hr*3)*(hr/6 tons)*(x tons/yr) = 4x/yr
(Aw)auto= -p (A/p, i%, n yr)-3500+F (A/F, i%, n yr)- variable cost (V.C)
Page | 2
79
Note: Negative sign for loss and positive sign for profit.
𝑖(1+𝑖)𝑛 𝑖
(Aw)auto =−23000 [(1+𝑖)𝑛 ] − 3500 + 4000 [(1+𝑖)𝑛 −1 ] – 𝑉. 𝐶
−1
0.1(1+0.1)10 0.1
=-23000[(1+0.1)10 −1 ]-3500+4000[(1+0.1)10 −1 ] − 1.5𝑥
=−6992 − 1.5𝑥
0.1(1+0.1)5
(Aw)manual =-8000[(1+0.1)5 −1 ]-1500-4𝑥
=−3610 − 4𝑥
At BEP,
−6992 − 1.5𝑥 = −3601 − 4𝑥
Therefore,
𝒙 = 𝟏𝟑𝟓𝟑 tons/yr
(b) Putting the value of x (2000 tons/yr)
(Aw)auto =−6992 − 1.5 ∗ 2000 = −9992 Tk./yr
(Aw)manual =−3610 − 4 ∗ 2000 = −11610 Tk./yr
Therefore, auto feed machine is best.
When x = 1000
(Aw)auto = -8492 Tk./yr & (Aw)manual = -7610 Tk./yr
Therefore, manual feed machine is best.
Page | 3
80
Problem 2: A certain fluidized-bed combustion vessel has an investment cost of $100,000 a life of 10 years
and negligible market (resale) value. Annual cost of materials, maintenance, and electric power for the
vessel are expected to total to $8,000.00. A major relining of combustion vessel will occur during the fifth
year at a cost of $20,000; during this year, the vessel will not be in service. If the interest rate is 15% per
year, what is the lump sum equivalent cost of this project at the present time?
Solution:
A= Annual cost = $8,000
i = Interest rate per year = 15%
n =10 years
P = Initial investment (present worth) cost = $100,000
A5= $20,000
At the time of 5th year, the Future worth (cost) is ($ 20000- $8000) = $12000
𝑃 𝑃
Present worth = − P – A ( 𝐴 , i %, n yr) – F ( 𝐹 , i %, n yr)
(1+𝑖)𝑛 −1 1
= −P −A [ 𝑖(1+𝑖)𝑛
] − F [(1+𝑖)𝑛 ]
(1+0.15)10 −1 1
= −$100,000−$ 8000 [ ] −$12000 [ ]
0.15(1+0.15)10 (1+0.15)5
= −$100,000 − $40,150.15 − $5,966.12
= −$146,116.27 (Answer).
Page | 4
81
Problem3: A food processing plant consumed 600,000 kwh of electric energy annually and pays an
average of Tk. 2.00 per kwh. A study is being made to generate its own power to supply the plant energy
required, and that the power plant installed would cost Tk. 2000,000. Annual operation and maintenance,
Tk. 800,000. Other expense, Tk. 100,000 per year. Life of the plant is 15 years, salvage value at the end of
life is Tk. 200,000; annual taxes and insurance 6% of the first cost; and rate of interest is 15%. Using the
sinking fund method for depreciation, determine if the power plant is justifiable.
Solution:
Annual cost, when the food processing plant pay P 2.00 per kwh
𝐓𝐤. 2.00
= (600,000kwh × 𝑘𝑤ℎ
) = Tk. 1200,000
Annual cost, if this energy can be developed by own power plant.

𝐴 𝐴
= −P ( 𝑝 , i %, n yr) − 800,000 - 100,000 + F ( 𝐹 , i %, n yr) − P×6%
𝑖(1+𝑖)𝑛 𝑖
= −P [ ] − 800,000 −100,000 + F [ ] −P×6%
(1+𝑖)𝑛 −1 (1+𝑖)𝑛 −1
0.15(1+0.15)15 .15
= −2000,000 [ ] −800,000 −100,000 +200,000[ ] − 2000,000 ×6%.
(1+0.15)15 −1 (1+0.15)15 −1
= − 342,034.11−800,000−100,000+4203.41−120,000
= −1357830.70
Since, this annual cost is larger than previous one so power plant is not justifiable. (Answer)
Page | 5
82
Problem 4: Show the following figure
Portable
Pump
Tank
Truck
Water Lagoon
4.95 km
Pump &
Pipe Line
The following data are given
For first case Second case
Portable pump (initial cost) =$ 800 pump (initial cost) =$ 600
Life = 8 years life = 10 years
Operate = $25/ day operate = $3/day
Truck and driven rent = $110/day pipe line cost = $3.52/meter
Interest = 15%
(a) How many days per year →suppose pipe line construction?
(b) For 40 days use which is best?
Solution:
Let, x day/year
Page | 6
83
$25 𝑑𝑎𝑦 $ $25𝑥

Variable cost, V.C=𝑑𝑎𝑦 ∗ 𝑥 𝑦𝑟
= 25𝑥 𝑦𝑟 = 𝑦𝑟
(for operation)
$110𝑥
Variable cost, V.C= 𝑦𝑟
Total Variable cost, V.C= $(110+25)/yr=$135x/yr

𝐴 0.15(1+0.15)8
(Aw)1st =−800 (𝑃 , 15%, 8) − 135𝑥 = −800 [ (1+0.15)8 −1 ] − 135𝑥 = −178.28 − 135𝑥
𝐴 𝐴
(Aw)2nd = −600 (𝑃 , 15%, 10) − 4.95 ∗ 1000 ∗ 3.52 (𝑃 , 15%, 10) − 𝑉. 𝐶
0.15(1 + 0.15)10 0.15(1 + 0.15)10

= −600 [ ] − 17424 [ ] − 3𝑥
(1 + 0.15)10 − 1 (1 + 0.15)10 − 1
= −119.55 − 3471.77 − 3𝑥 = −3591.32 − 3𝑥
For BEP,
(Aw)1st = (Aw)2nd
Or, −178.28 − 135𝑥 = −3591.32 − 3𝑥
Or, 𝑥 = 25.87 days/yr
∴ 𝑥 = 25.9days/year
Above 25 days/yr. (Ans.)
When x = 40
(Aw)1st = $-5578.28
(Aw)2nd = $-3711.32
Therefore 2nd type is best. (Ans.)
Page | 7
84
Problem 5: Toy manufacturer used two machines for manufacturing toys. The costs are given below.
Machine A Machine B
Initial cost $18000 $12000
Life 6 years 4 years
Salvage value $2000 $500
Overhaul cost (after 3 yrs) $3000 $000
Annual operating cost $6000 $5000
Interest rate for both 15%. Four worker works by both machine with $12.50 cost per hour per person.
They work eight hours in a day and produce 1000 toys. Substitute purchase price of metal part per toy is
$0.60
How many numbers of toys to manufacture each year to justify the purchase machine?
Solution:
Let, production per year x toys.
Variable cost, V.C = (cost per unit) *(unit per year)
$12.50 8 ℎ𝑟 𝑢𝑛𝑖𝑡𝑠 $0.4𝑥

= (4 𝑜𝑝𝑒𝑟𝑎𝑡𝑜𝑟𝑠 ∗ )∗( ) ∗ (𝑥 )=
ℎ𝑟 1000 𝑢𝑛𝑖𝑡𝑠 𝑦𝑟 𝑦𝑟
For purchase,
$0.60 𝑡𝑜𝑦𝑠 $0.6𝑥
Cost = ( ∗𝑥 ) =
𝑡𝑜𝑦𝑠 𝑦𝑟 𝑦𝑟
𝐴 𝐴 𝑃 𝐴
(Aw)A = −18000 (𝑃 , 15%, 6) + 2000 (𝐹 , 15%, 6) − 6000 − 3000 (𝐹 , 15%, 3) (𝑃 , 15%, 6)
𝑃 𝐴
𝑤ℎ𝑒𝑟𝑒, −3000 ( , 15%, 3) ( , 15%, 6) is overhauling cost.
𝐹 𝑃
0.15(1 + 0.15)6 0.15 1
= −18000 [ 6
] + 2000 [ 6 ] − 6000 − 3000 [ ]
(1 + 0.15) − 1 (1 + 0.15) − 1 (1 + 0.15)3
0.15(1 + 0.15)6
∗[ ]
(1 + 0.15)6 − 1
= −11049
𝐴 𝐴
(Aw)B = −12000 (𝑃 , 15%, 4) + 500 (𝐹 , 15%, 4) − 5000
0.15(1 + 0.15)4 0.15

= −12000 [ 4
] + 500 [ ] − 5000
(1 + 0.15) − 1 (1 + 0.15)4 − 1
= −9103.31
Page | 8
85
At BEP,
−0.6𝑥 = (Aw)A + (Aw)B − V. C
𝑜𝑟, −0.6x = −11049 − 9103.31 − 0.4x
∴ x = 100760 units/year (Ans.)
Page | 9
Inventory
86
12 Management
PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
© 2011 Pearson Education, Inc. publishing as Prentice Hall 12 - 1

87
Inventory
Inventory is the stocks of goods or materials that are
on hand for future use. In general, inventory means
the stocks related to the production or business.
Inventory Control
Inventory control may be defined as a scientific
method of finding out how much stock should be
maintained in order to meet production demand and
can be able to provide right type of material at right
time in right quantities and competitive cost.
12 - 2
88
Inventory Management
The objective of inventory

management is to strike a balance
between inventory investment and
customer service
12 - 3
89
Importance of Inventory
◆ One of the most expensive assets of

many companies representing as much
as 50% of total invested capital
◆ Operations managers must balance
inventory investment and customer
service
12 - 4
90
Functions of Inventory
1. To meet expected demand
2. To decouple or separate various parts of the
production process.
3. To decouple the firm from fluctuations in
demand and provide a stock of goods that will
provide a selection for customers.
4. To take advantage of quantity discounts.
5. To hedge against inflation.
6. Increase cash flow and profitability.
12 - 5
91
Types of Inventory
◆ Raw material
◆ Purchased but not processed
◆ Work-in-process
◆ Undergone some change but not completed
◆ A function of cycle time for a product
◆ Maintenance/Repair/Operating (MRO)
◆ Necessary to keep machinery and processes
productive
◆ Finished goods
◆ Completed product awaiting shipment
12 - 6
92
The Material Flow Cycle
Cycle time
95% 5%
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
12 - 7
93
Managing Inventory
1. How inventory items can be classified

2. How accurate inventory records can
be maintained
12 - 8
94
ABC Analysis
◆ Divides inventory into three classes
based on annual dollar volume
◆ Class A - high annual dollar volume
◆ Class B - medium annual dollar volume
◆ Class C - low annual dollar volume
◆ Used to establish policies that focus on
the few critical parts and not the many
trivial ones
12 - 9
95
ABC Analysis
Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class
#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A
72%
#11526 500 154.00 77,000 33.2% A
#12760 1,550 17.00 26,350 11.3% B
#10867 30% 350 42.86 15,001 6.4% 23% B
#10500 1,000 12.50 12,500 5.4% B
12 - 10
96
ABC Analysis
Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class
#12572 600 $ 14.17 $ 8,502 3.7% C
#14075 2,000 .60 1,200 .5% C
#01036 50% 100 8.50 850 .4% 5% C
#01307 1,200 .42 504 .2% C
#10572 250 .60 150 .1% C
8,550 $232,057 100.0%
12 - 11
97
Percent of annual dollar usage ABC Analysis

A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |
10 20 30 40 50 60 70 80 90 100
Percent of inventory items
12 - 12
98
ABC Analysis
◆ Other criteria than annual dollar

volume may be used
◆ Anticipated engineering changes
◆ Delivery problems
◆ Quality problems
◆ High unit cost
12 - 13
99
ABC Analysis
◆ Policies employed may include

◆ More emphasis on supplier development
for A items
◆ Tighter physical inventory control for A
items
◆ More care in forecasting A items
12 - 14
100
Record Accuracy
◆ Accurate records are a critical ingredient in
production and inventory systems
◆ Allows organization to focus on what is needed
◆ Necessary to make precise decisions about
ordering, scheduling, and shipping
◆ Incoming and outgoing record keeping must be
accurate
◆ Stockrooms should be secure
12 - 15
Cycle Counting 101
◆ Items are counted and records updated on a

periodic basis
◆ Often used with ABC analysis
to determine cycle
◆ Has several advantages
1. Eliminates shutdowns and interruptions
2. Eliminates annual inventory adjustment
3. Trained personnel audit inventory accuracy
4. Allows causes of errors to be identified and corrected
5. Maintains accurate inventory records
12 - 16
102
Cycle Counting Example

5,000 items in inventory, 500 A items, 1,750 B items, 2,750
C items Policy is to count A items every month (20 working
days), B items every quarter (60 days), and C items every
six months (120 days)
Item Number of Items

Class Quantity Cycle Counting Policy Counted per Day
A 500 Each month 500/20 = 25/day
B 1,750 Each quarter 1,750/60 = 29/day
C 2,750 Every 6 months 2,750/120 = 23/day
77/day
12 - 17
103
12 - 18
104
12 - 19
105
Holding, Ordering, and

Setup Costs
◆ Holding costs - the costs of holding or
“carrying” inventory over time
◆ Ordering costs - the costs of placing an
order and receiving goods
◆ Setup costs - cost to prepare a machine
or process for manufacturing an order
12 - 20
106
Holding Costs
Cost (and range)
as a Percent of
Category Inventory Value
Housing costs (building rent or 6% (3 - 10%)
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or 3% (1 - 3.5%)
depreciation, power, operating cost)
Labor cost 3% (3 - 5%)
Investment costs (borrowing costs, taxes, 11% (6 - 24%)
and insurance on inventory)
Pilferage, space, and obsolescence 3% (2 - 5%)
Overall carrying cost 26%
12 - 21
107
Holding Costs
Cost (and range)
as a Percent of
Category Inventory Value
Housing costs (building rent or 6% (3 - 10%)
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or 3% (1 - 3.5%)
depreciation, power, operating cost)
Labor cost 3% (3 - 5%)
Investment costs (borrowing costs, taxes, 11% (6 - 24%)
and insurance on inventory)
Pilferage, space, and obsolescence 3% (2 - 5%)
Overall carrying cost 26%
12 - 22
108
Inventory Models for

Independent Demand
Need to determine when and how much to order
1. Basic economic order quantity (EOQ)

2. Production order quantity (POQ)
3. Discount order quantity (DOQ)
12 - 23
109
Basic EOQ Model

Important assumptions
1. Demand is known, constant, and independent

2. Lead time is known and constant
3. Receipt of inventory is instantaneous and complete
4. Quantity discounts are not possible
5. Only variable costs are setup and holding
6. Stockouts can be completely avoided
12 - 24
110
Inventory Usage Over Time
Usage rate Average

Order inventory
Inventory level
quantity = Q on hand
(maximum
Q
inventory
level) 2
Minimum
inventory
0
Time
12 - 25
111
Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and
setup (order)
Minimum
total cost
Annual cost
Holding or
Carrying cost
Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
12 - 26
112
The EOQ Model

Annual setup cost =
D
Q
S
Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)

x (Setup or order cost per order)
Annual demand Setup or order

=
Number of units in each order cost per order
= D (S)
Q
12 - 27
113
The EOQ Model

Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
Order quantity
= (Holding cost per unit per year)
2
= Q (H)
2
12 - 28
114
The EOQ Model

Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Optimal order quantity is found when annual setup cost

equals annual holding cost
D Q
S = H
Q 2
Solving for Q*
2DS = Q2H
Q2 = 2DS/H
Q* = 2DS/H
12 - 29
115
An EOQ Example
Determine optimal number of needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
12 - 30
116
An EOQ Example
D = 1,000 units Q* = 200 units
S = $10 per order
Expected Demand D
number of = N = =
orders Order quantity Q*
1,000
N= = 5 orders per year
200
12 - 31
117
An EOQ Example
S = $10 per order N = 5 orders per year
Number of working
Expected days per year
time between = T =
orders N
250
T= = 50 days between orders
5
12 - 32
118
An EOQ Example
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost

D Q
TC = S + H
Q 2
1,000 200
TC = ($10) + ($.50)
200 2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
12 - 33
119
12 - 34
120
An EOQ Example
Management underestimated demand by 50%
D = 1,000 units 1,500 units Q* = 200 units
D Q
TC = S + H
Q 2
1,500 200
TC = ($10) + ($.50) = $75 + $50 = $125
200 2
Total annual cost increases by only 25%
12 - 35
121
An EOQ Example
Actual EOQ for new demand is 244.9 units
D = 1,000 units 1,500 units Q* = 244.9 units
D Q
TC = S + H
Q 2 Only 2% less
1,500 244.9 than the total
TC = ($10) + ($.50) cost of $125
244.9 2
when the
TC = $61.24 + $61.24 = $122.48 order quantity
was 200
12 - 36
122
Reorder Points
◆ EOQ answers the “how much” question
◆ The reorder point (ROP) tells “when” to
order
Demand Lead time for a
ROP = per day new order in days
=dxL
D
d = Number of working days in a year
12 - 37
123
Reorder Point Curve

Q*
Inventory level (units)
Resupply takes place as order arrives
Slope = units/day = d
ROP
(units)
Time (days)
Lead time = L
12 - 38
124
Reorder Point Example

Demand = 8,000 iPods per year
250 working day year
Lead time for orders is 3 working days
D
d=
Number of working days in a year
= 8,000/250 = 32 units
ROP = d x L
= 32 units per day x 3 days = 96 units
12 - 39
125
Production Order Quantity

Model
◆ Used when inventory builds up
over a period of time after an
order is placed
◆ Used when units are produced
and sold simultaneously
12 - 40
126

Model
Part of inventory cycle during
which production (and usage)
is taking place
Inventory level
Demand part of cycle

with no production
Maximum
inventory
t Time
12 - 41
127

Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days
Annual inventory Holding cost

= (Average inventory level) x
holding cost per unit per year
Annual inventory
= (Maximum inventory level)/2
level
Maximum Total produced during Total used during

= –
inventory level the production run the production run
= pt – dt
12 - 42
128

Model
t = Length of the production run in days
Maximum Total produced during Total used during

= –
inventory level the production run the production run
= pt – dt
However, Q = total produced = pt ; thus t = Q/p
Maximum Q Q d
inventory level = p –d =Q 1–
p p p
Maximum inventory level Q d

Holding cost = (H) = 1– H
2 2 p
12 - 43
129

Model
D = Annual demand
Setup cost = (D/Q)S

Holding cost = 1 HQ[1 - (d/p)]
2
1
(D/Q)S = 2 HQ[1 - (d/p)]
2
2DS
Q =
H[1 - (d/p)]
2DS
Q*p =
H[1 - (d/p)]
12 - 44
130

Example
D = 1,000 units p = 8 units per day
S = $10 d = 4 units per day
H = $0.50 per unit per year
2DS
Q* =
H[1 - (d/p)]
2(1,000)(10)
Q* = = 80,000
0.50[1 - (4/8)]
= 282.8 or 283 hubcaps

12 - 45
131

Model
Note:
D 1,000
d = 4 = Number of days the plant is in operation = 250
When annual data are used the equation becomes
2DS
Q* =
annual demand rate
H 1–
annual production rate
12 - 46
132
Quantity Discount Models

◆ Reduced prices are often available when
larger quantities are purchased
◆ Trade-off is between reduced product cost
and increased holding cost
Total cost = Setup cost + Holding cost + Product cost
D Q
TC = S+ H + PD
Q 2
12 - 47
133
A typical quantity discount schedule
Discount Discount
Number Discount Quantity Discount (%) Price (P)
1 0 to 999 no discount $5.00
2 1,000 to 1,999 4 $4.80
3 2,000 and over 5 $4.75
Table 12.2
12 - 48
134

Steps in analyzing a quantity discount
1. For each discount, calculate Q*
2. If Q* for a discount doesn’t qualify,
choose the smallest possible order size
to get the discount
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
12 - 49
135

Total cost curve for discount 2
Total cost
curve for
discount 1
Total cost $
Total cost curve for discount 3

b
a Q* for discount 2 is below the allowable range at point a
and must be adjusted upward to 1,000 units at point b
1st price 2nd price

break break
0 1,000 2,000
Order quantity
12 - 50
136
Quantity Discount Example

Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars/order
(.2)(5.00)
2(5,000)(49)
(.2)(4.80)
2(5,000)(49)
(.2)(4.75)
12 - 51
137

Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
(.2)(5.00)
2(5,000)(49)
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
(.2)(4.75) 2,000 — adjusted
12 - 52
138

Annual Annual Annual
Discount Unit Order Product Ordering Holding
Number Price Quantity Cost Cost Cost Total
1 $5.00 700 $25,000 $350 $350 $25,700
2 $4.80 1,000 $24,000 $245 $480 $24,725
3 $4.75 2,000 $23.750 $122.50 $950 $24,822.50
Table 12.3
Choose the price and quantity that gives
the lowest total cost
Buy 1,000 units at $4.80 per unit
12 - 53

COMBINE Akib sir

Uploaded by

Copyright:

Available Formats

COMBINE Akib sir

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

COMBINE Akib sir

Uploaded by

Copyright:

Available Formats

1

Combined by Md. Selim Reza

Mapping of Course Learning Outcomes (CLOs) to Program Outcomes (POs):

SN COURSE CONTENT Hrs CLOs

SN COURSE CONTENT Hrs CLOs

SEE- Semester End Examination

Break Even Analysis

Ex: Executive Salaries, Equipment, depreciation of pl administration, rent, insurance etc.

Variable Cost: Which varies with units of output?

Ex: materials, labor and direct cost related to the production.

F + aQ1= bQ1 F Fixed Cost

Large angle of incidence and long margin of safety is more profitable/Desirable/effective of a

The breakeven point is lowered in the following ways:-

Assumptions (for break event chart):

Solve following problem. Calculate BEP for different condition.

Units of Fixes cost Variable cost Total cost Sales

a = VC (Variable Cost) per unit

Sales price per unit

Units of output for profit and loss to be equal;

All are constant except the value of a reduce from 1 to 0.75

Reducing Variable Cost:

Fixed cost, selling price = constant

The fixed investment for manufacturing a product is a particular year is Tk 80,000.

Then what would be the production volume at breakeven point.

Reduce in Fixed Cost

Planned profit is achieved, when,

Reduce selling price:

❖ If Company wants to earn a profit Tk 30 by increasing its price to Tk 2.20 per

Planned profit t is achieved when

for planned profit

❖ The IKon Company has the following cost

Fixed cost = Tk 100,000

Variable cost = Tk 4 per units

Sales price = Tk 4.50 per unit.

a) If company wants to earn a profit of 10% on its investment of Tk 500,000. How

(i) Reduces its fixed cost to Tk, 90,000

(ii) Increasing its, sales price to Tk 5 per units

(iii) Reduces its variable cost by 10%

Given, Fixed cost, F = 100,000

V.c,a = 4 per unit

Sales price b = 4.5 per unit

Unit of output profit and loss will be equal at

Planned profit is achieved when,

b. (i) Reduces its Fixed Cost Tk 90000

Increasing its sales price Tk 5/units

= 100,000 unit Ans:

(iii) Reduced its variable cost by 10%

(iv)Reduce its sales price 10%

∴ b′ = 0.9 × 4.5 = Tk 4.05/unit

= 1.1× 10000 = 110000

V.C, 𝑎′ = 0.9 × 4 or,

❖ Briefly describe about the economics of new design.

Want to convert of old plant into the new plant

Thinking how the conversion is possible.

Considering factors to convert old design into new design:

a) design and engineering

c) purchase of new machine

d) change of plant layout.

ii) What is called then preparation or change over cost.

What is profit/volume (p/v) chart? Describe.