Revenue and Production

Only available on StudyMode
  • Download(s) : 503
  • Published : April 22, 2013
Open Document
Text Preview
The purpose of this report is to analyze the opportunity to produce plastic components for cartridge production and choose the best alternative. It is predicted that the annual demand growth is a triangular distribution with a minimum of 5%, most likely of 17% and a maximum of 25%. Due to the continuous growth in the demand, the alternatives cannot be compared using just the data for 2010. An analysis is carried out for the time period 2011 to 2015 and the present worth of the net income is considered as the criteria to select the alternative. The analysis basically can be divided into 5 steps: * Forecasting demand for next five years,

* Estimating capacity required,
* Developing production strategy,
* Calculate the operating expenses for the alternatives,
* Select the alternative based on the present worth of net income. From the estimated installed base of 7500 OmniVue instruments at the end of year 2010, the demand for the OmniVue instruments and cartridges are forecasted. There is a new product OmniVue mobile, ready to be launched in year 2013. It is assumed that the OmniVue mobile can be accounted for 30% of the demand for Instruments in year 2013, 50% in year 2014 and 60% in year 2015. The growth in demand for the OmniVue instrument is assumed to decrease after the release of OmniVue mobile. It is estimated that the production capacity of Bergerac to produce OmniVue instruments is approximately 2000 units per year with a production of 5 days per week. It is inferred that using level strategy, the probability that the demand is not met in the next five years is 5.74%. There is no need to increase the capacity of the production line apart from changes required when the OmniVue mobile is released. There are various strategies which are compared in build option. For each production strategy, the optimum solution for the capacities in each year is found out. After finding the optimum solutions, the production strategies are compared with each other to find out the best solution for the build option. The production strategies that are analyzed are: * Level production strategy and Chase production strategy * Overtime is allowed / not allowed

The base values assumed to calculate the production costs for cartridges are included in Appendix F. Based on the production plan, the expenses incurred are calculated for both options. The expenses are calculated for the years 2011 to 2015. The expenses and revenue for cartridges and instruments are shown in Appendix H and Appendix I respectively. The income statement is prepared from the expenses calculated and the revenue (refer to Appendix J). The income tax rate for the company is estimated to be 39% from the income statements for years 2007 to 2009. The revenues and other expenses from operations other than OmniVue is estimated and added to the income statement. The net income is calculated. The cash flows for years 2011 to 2015 is also calculated. The net present worth is calculated for the net income and the cash flows. The objective used to optimize the solution is to maximize the mean of net present worth of the net income and cash flows. The four production strategies for the build option are optimized and the maximum net present worth for the options is forecasted. The best solution from the four strategies is chosen and compared to the net present worth of the buy option. Based on the analysis, build is a better option than buy option. The present worth of the net income is highest for level production, overtime allowed. But level production, overtime not allowed is very close to it and it does not affect the employee relationship. It is recommended to use level production strategy, no overtime (net present worth for net income is $59.8 million). The current objective is to produce the plastic components for Bergerac with the lowest expenses, which can be achieved by building a unit for plastic component...
tracking img