Applichem Case Analysis 1

Topics: Costs, Variable cost, Fixed cost Pages: 5 (1075 words) Published: January 10, 2011

A Case Analysis
Submitted to
Prof. Jishnu Hazra
Indian Institute of Management, Bangalore

December 20, 2005

Partial Fulfillment of the Requirement for the
Operations Management Course in the
Post Graduate Program in Management

Submitted by
Mahesh Bansal (0511018)
Nitin Bhadauria (0511023)
Rahul Parihar (0511033)
Uma Gurumurthy (0511050)
Yadavendra Yadava (0511057)

Release-ease was a specialty chemical developed by Applichem. Molds for plastic parts are precision stainless steel molds that are difficult to clean, and are used repeatedly and hence un-molding and cleaning became the bottleneck. With this, customers could formulate a plastic molding compound which released easily from metal molds after compression molding.

Release-ease is manufactured by a 4 step process –
1. Reaction Step: Raw materials are combined in a precise sequence under pressure and heat to form release-ease, which is then precipitated out to form a slurry. The quality of release-ease, amount of raw materials and the characteristics of the process is unaffected by source of energy used in plant. Steam, natural gas, oil and electricity were combined differently at different plants to minimize local cost. 2. Cleaning: In this step, the cleaning or isolation of the release-ease particles from the slurry was performed by moving it on a conveyor belt. 3. Drying: In this step, the release particles were dried. 4. Packaging: The packaging of release-ease powder in bags on an automated filler line was undertaken.


Through out the process there exists possibility for yield loss. The average yield of release-ease on raw material A is a key indicator of the overall performance of the release-ease manufacturing process at different plants. Exhibit 4 gives the Annual Production Capacity, Annual Design Capacity, Average Yield and the Annual Production Capacity of each plant.

Assuming that Selling Price is constant on an average, the cost of transportation and production put together is minimized, for maximum profits. For this purpose, the software package LINDO has been employed. The problem is stated in terms of Integer Linear Programming (Transport Problem) so as to reach the optimum solution. The optimum solution here involves the reduction of Production cost and Transportation cost, as well as the cost incurred in paying the customs duty (for part (b), so as to be able to determine the most efficient way of producing Release – ease. These formulations are designed to help us in determining the amount of production by the various locations of the company.

1. Fixed costs are calculated from Exhibit 2 in the case. These costs are given in terms of US $ per 100 pounds of release-ease. As the costs are fixed we expect them to be same for all volumes. These values are shown in Exhibit 1 below. 2. The package, load and shipping; raw material overhead (Exhibit 2 in case) are treated as variable cost. These values are shown in Exhibit 2 below. 3. The distribution/ transportation cost from one of the six production centers to a particular center within the same region is zero. For ex. Distribution cost from Venezuela to Columbia or Brazil (other countries of Latin America) is negligible. 4. The fixed cost in the formulation can be ignored because they are negligible. The variable costs are of the order 108 and the fixed costs are to the order of 102 per million pounds of release-ease. 5. While calculating the customs duty the value of imports is calculated on the total variable cost of manufacturing as given in Exhibit 2 below. 6. The company bears the customs duty and not the customer. For ex. if Venezuela imports 10 pounds, the plant at Venezuela will be bearing the cost. It is calculated on Variable cost. The values are shown in Exhibit 3 below. 7. The maximum practical...
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