Operations Management

Module 1 : Production and operation Management:

Production and Operations Management: Introduction, Functions within business
organizations, the operation management function, Classification of production systems,
Productivity, factors affecting productivity, contemporary issues and development
Decision Making: The decision process, characteristics of operations decisions, use of models,
decision making environments. 10 Hours

Introduction:
Operation is that part of as organization, which is concerned with the transformation of a range
of inputs into the required output (services) having the requisite quality level. Management is
the process, which combines and transforms various resources used in the operations subsystem
of the organization into value added services in a controlled manner as per the policies of the
organization.
The set of interrelated management activities, which are involved in manufacturing certain
products, is called as production management. If the same concept is extended to services
management, then the corresponding set of management activities is called as operations
management.

Production and Production System

Production function is ‘the part of an organisation, which is concerned with the
transformation of a range of inputs into the required outputs (products) having the requisite
quality level’.
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.
The production system is ‘that part of an organisation, which produces products of an
organisation. 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’.
A simplified production system is shown below:
 Fig 1.1 Schematic production system
The production system has the following characteristics:
1. Production is an organised activity, so every production system has an objective.
2. The system transforms the various inputs to useful outputs.
3. It does not operate in isolation from the other organisation system.
4. There exists a feedback about the activities, which is essential to control and improve
system performance.

Classification of Production System

Production systems can be classified as Job-shop, Batch, Mass and Continuous production
systems.

Fig. 1.2 Classifications of production systems

1.5.1 Job-Shop Production

Job-shop production are characterised by manufacturing one or few quantity of products
designed and produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products.
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.
 Job-shop Production is characterised by
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product,
capacities for each work centre and order priorities.
Advantages
Following are the advantages of Job-shop Production:
1. Because of general purpose machines and facilities variety of products can be produced.
2. Operators will become more skilled and competent, as each job gives them learning
opportunities.
3. Full potential of operators can be utilised.
4. Opportunity exists for Creative methods and innovative ideas.
Limitations
Following are the limitations of Job-shop Production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements.

1.5.2 Batch Production

American Production and Inventory Control Society (APICS) defines Batch Production as a
form of manufacturing in which the job pass through the functional departments in lots or
batches and each lot may have a different routing. It is characterised by the manufacture of
limited number of products produced at regular intervals and stocked awaiting sales. Batch
Production is characterised by 1. Shorter production runs.
2. Plant and machinery are flexible.
3. Plant and machinery set up is used for the production of item in a batch and change of
set up is required for processing the next batch.
4. Manufacturing lead-time and cost are lower as compared to job order production.
Advantages

Following are the advantages of Batch Production:

1. Better utilisation of plant and machinery.
2. Promotes functional specialisation.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Limitations
Following are the limitations of Batch Production:
1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
 3. Work in process inventory is higher compared to continuous production.
4. Higher set up costs due to frequent changes in set up.

1.5.3 Mass Production

Manufacture of discrete parts or assemblies using a continuous process are called Mass
Production. This production system is justified by very large volume of production. The
machines are arranged in a line or product layout. Product and process standardisation exists
and all outputs follow the same path.
Mass Production is characterised by
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and output
rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Advantages
Following are the advantages of Mass Production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilisation due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Limitations
Following are the limitations of Mass Production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.

1.5.4 Continuous Production

Production facilities are arranged as per the sequence of production operations from the first
operations to the finished product. The items are made to flow through the sequence of
operations through material handling devices such as conveyors, transfer devices, etc.
Continuous Production is characterised by
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
Advantages
Following are the advantages of Continuous Production:
1. Standardisation of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilisation due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Limitations
Following are the limitations of Continuous Production:
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.

Production Management
Production management is ‘a process of planning, organising, 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’.
Objectives of Production Management
The objective of the production management is ‘to produce goods and services of Right Quality
and Quantity at the Right time and Right manufacturing cost’.
1. Right Quality: The quality of product is established based upon the customers need.
The right quality is not necessarily being the best quality. It is determined by the cost of the
product and the technical characteristics as suited to the specific requirements.
2. Right Quantity: The manufacturing organisation should produce the products in right
number. If they are produced in excess of demand the capital will block up in the form of
inventory and if the quantity is produced in short of demand, leads to shortage of products.
3. Right Time: Timeliness of delivery is one of the important parameter to judge the
effectiveness of production department. So, the production department has to make the optimal
utilization of input resources to achieve its objective.
4. Right Manufacturing Cost: Manufacturing costs are established before the product is
actually manufactured. Hence, all attempts should be made to produce the products at pre-
established cost, so as to reduce the variation between actual and the standard (pre-established)
cost.

Operations System :
An operation was defined in terms of the mission it serves for the organisation, technology it
employs and the human and managerial processes it involves. Operations in an organisation
can be categorised into Manufacturing Operations and Service Operations. Manufacturing
Operations is a conversion process that includes manufacturing yields a tangible output: a
product, whereas, a conversion process that includes service yields an intangible output: a deed,
a performance, an effort.
 In some of the organisation the product is a physical good (breakfast in hotels) while in
others it is a service (treatment in hospitals). Bus and taxi services, tailors, hospital and builders
are the examples of an operations system. The basic elements of an operation system show in
Figure 1.3 with reference to departmental stores.
A departmental store's has an input like land upon which the building is located, labour as
a stock clerk, capital in the form of building, equipment and merchandise, management skills
in the form of the store’s manager. Output will be serviced customer with desired merchandise.
Random fluctuations will be from external or internal sources, monitored through a feedback
system.

Fig.1.3 Operations system for department stores

Framework of Managing Operations:

Managing Operations can be enclosed in a frame of general management function as shown in
above figure. Operation managers are concerned with planning, organising, and controlling
the activities, which affect human behaviour through models.
Planning is the activity that establishes a course of action and guide future decision-making.
The operations manager defines the objectives for the operations subsystem of the organisation,
and the policies, and procedures for achieving the objectives. This stage includes clarifying the
role and focus of operations in the organization’s overall strategy. It also involves product
planning, facility designing and using the conversion process.
Organizing is the activities that establish a structure of tasks and authority. Operation
managers establish a structure of roles and the flow of information within the operations
subsystem. They determine the activities required to achieve the goals and assign authority and
responsibility for carrying them out.
Controlling is the activities that assure the actual performance in accordance with planned
performance. To ensure that the plans for the operations subsystems are accomplished, the
operations manager must exercise control by measuring actual outputs and comparing them to
planned operations management. Controlling costs, quality, and schedules are the important
functions here.
1. Behaviour: Operations managers are concerned with the activities, which affect human
behaviour through models. They want to know the behaviour of subordinates, which affects
managerial activities. Their main interest lies in the decision-making behaviour.
 2. Models: Models represents schematic representation of the situation, which will be
used as a tool for decision-making. Following are some of the models used.
Aggregate planning models for examining how best to use existing capacity in short term,
break-even analysis to identify break-even volumes, Linear programming and computer
simulation for capacity utilisation, Decision tree analysis for long-term capacity problem of
facility expansion,

Operation Management
Joseph G .Monks defines Operations Management as the process whereby resources, flowing
within a defined system, are combined and transformed by a controlled manner to add value
in accordance with policies communicated by management.
The operations managers have the prime responsibility for processing inputs into outputs.
They must bring together under production plan that effectively uses the materials, capacity
and knowledge available in the production facility. Given a demand on the system work must
be scheduled and controlled to produce goods and/or services required. Control must be
exercised over such parameters such as costs, quality and inventory levels.

Scope of Operation Management

Operations Management concern with the conversion of inputs into outputs, using physical
resources, so as to provide the desired utilities to the customer while meeting the other
organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself
from other functions such as personnel, marketing, finance, etc. by its primary concern for
‘conversion by using physical resources’. Following are the activities, which are listed under
Production and Operations Management functions:
1. Location of facilities.
2. Plant layouts and Material Handling.
3. Product Design.
4. Process Design.
5. Production and Planning Control.
6. Quality Control.
7. Materials Management.
8. Maintenance Management.

Fig. 1.9 Environment of operations

Productivity
Productivity is defined in terms of utilization of resources, like material and labour. In simple
terms, productivity is the ratio of output to input. For example, productivity of labour can be
measured as units produced per labour hour worked. Productivity is closely linked with quality,
technology and profitability. Hence, there is a strong stress on productivity improvement in
competitive business environment.
Productivity can be improved by (a) controlling inputs, (b) improving process so that the
same input yields higher output, and (c) by improvement of technology. These aspects are
discussed in more detail in the lesson on Productivity Management.
Productivity can be measured at firm level, at industry level, at national level and at
international level.

Factors Affecting Productivity

Economists site a variety of reasons for changes in productivity. However some of the principle
factors influencing productivity rate are:
1. Capital/labour ratio: It is a measure of whether enough investment is being made in
plant, machinery, and tools to make effective use of labour hours.
2. Scarcity of some resources: Resources such as energy, water and number of metals will
create productivity problems.
3. Work-force changes: Change in work-force effect productivity to a larger extent, because
of the labour turnover.
4. Innovations and technology: This is the major cause of increasing productivity.
 5. Regulatory effects: These impose substantial constraints on some firms, which lead to
change in productivity.
6. Bargaining power: Bargaining power of organized labour to command wage increases
excess of output increases has had a detrimental effect on productivity.
7. Managerial factors: Managerial factors are the ways an organization benefits from the
unique planning and managerial skills of its manager.
8. Quality of work life: It is a term that describes the organizational culture, and the extent
to which it motivates and satisfies employees.

DECISION MAKING
Business firms make hundreds of decisions relating to operations every day, some having a
significant impact on the firm’s future business and some others with very less impact, some
routine and some others non-routine, some having immediate repercussions and some long-
term implications, some based on full information, and some on partial or no information, some
simple and some others very complex, some based on judgement and some others based on
complex analysis of data, some at the top level of the firm and others at the lower levels, and
so on.
For example, where to locate a new plant? How much material to order? Should the labour
demands for new standard time be entertained? Who should take a particular decision? How
many maintenance personnel to be employed? Where to train personnel? How long to train?
How much to spend on R&D? Which technology to buy? Whom to collaborate with? How to
motivate personnel? Which capacity machine to install? Whom to promote? What should be
the strategy to attract customers? When to maintain a machine? Whether to buy or make a
component? Which market to enter and with which products? Etc.
Can all these decisions be made by our natural ability or simple judgement? Often, the decision
situations are so complex that one cannot effectively handle them in the absence of
mathematical, statistical and other tools. Hence, it is necessary to understand decision making
(a component of management) as a scientific process, the characteristics of decisions,
framework for decision making and decision methodologies and techniques.

CHARECTARISTICS OF DECISIONS
Decisions can be broadly grouped into three categories namely, (i) Strategic decisions, (ii)
Tactical decisions and (iii) Operational decisions. Hence, with respect to operations activity
too, we can identify strategic, tactical and operational decisions.
Regardless of the level of decision making, the use of quantitative and qualitative techniques
is wide spread among business community. This is because, the use of such tools provide a
systematic approach to solving the problem and making a decision. Several techniques have
been developed to aid decision making. However, not all tools can be used in all decision
making situations. The appropriateness of the technique for a decision-making situation
depends on several factors such as: (a) the significance of the decision, (b) time and cost
limitations and (c) the degree of complexity of the decision. The decisions with far reaching
consequences need to be based on adequate amount of data, thorough analysis and careful
interpretations and sound judgement. Several causal models are available for analysis of such
decision situations. Often, the decisions are to be made quickly. In such situations techniques
that require large amount of time may not be appropriate. Further, the decision maker should
be able to provide cost justification for the technique used. Finally, increased complexity of
decisions calls for the use of sophisticated techniques as a normal human being cannot
comprehend the problem situation in its entirety. The complexity increases with increasing
number of variables, decision criterions, constraints, and paucity of relevant and timely data.
FRAMEWORK FOR DECISION MAKING
The following steps constitute a framework for decision making and provide a systematic
approach.
(i) Defining the problem: This step involves identification of relevant variables, scope of
the problem, realistic assumptions to work with, etc. Identifying the stake holders, the direct
and indirect impact of the decisions, immediate and delayed impact of the decisions are also
a part of this stage.
(ii) Establishing the decision criteria (objectives): Establishing the
objectives/goals/purpose of decision is crucial. Quite often, maximizing the profit is used as
a criterion. However, these days, firms use multiple criteria such as employee welfare, cost,
impact on environment, market share, productivity, stability, growth, technological
leadership, reputation and good will, etc.
(iii) Formulation of model: The relevant variables are abstracted from the real-life problem
and used to formulate a model to represent the problem in a simpler manner. Formulation
implies expressing the underlying relationships among the variables in a testable form. There
are several types of models: (1) Verbal; (2) Physical or iconic; (3) Schematic or diagrammatic;
and (4) Mathematical models.
(iv) Generation of alternatives: Alternative solutions to the model can be generated by
varying the values of the variables and experimented. Mathematical and statistical models are
more amenable for modifications and hence to generate alternative solutions quickly.
(v) Evaluation of alternatives and selecting the best one: Alternative solutions are
evaluated against the already established criteria. Best alternative or decision is one which
most closely satisfies the criteria. Some procedures such as LPP inherently seek an optimum
solution (either maximizing or minimizing the criterion). Whenever optimum solution cannot
be guaranteed at a reasonable cost and time, heuristics can be tried out to arrive at solutions
that are close to optimum.
(vi) Implementation and monitoring: Although these are not strictly a part of decision
making, the managerial action would be complete only when the decision is implemented and
monitored. Fellow managers have to be convinced of the merit of the decision made and its
implementation has to be followed through. Implementation of the decision is also an art.
DECISION METHODOLOGY
Techniques/methodologies that are useful for decision making can be categorized based on
the degree of certainty that exists with respect to the decision variables and possible outcomes.
The degree of certainty is classified as: (i) Complete certainty; (ii) somewhat uncertain and
risky; and (iii) complete uncertainty. When we know for sure what would be the outcome of
our decision then we are dealing with a problem under conditions of uncertainty. When a
decision has more than one possible outcome and we know the likelihood of each outcome
we are dealing with a problem under conditions of risk. Finally, when a decision has more
than one possible outcome and we do not know the likelihood of each outcome, we are dealing
with a problem under conditions of uncertainty. Examples of decision making under the three
situations are given below.

EXAMPLE – Decision under conditions of Certainty

Problem 1. A chain of supermarkets is going to open a new store at one of four possible
locations. Management wishes to select the location that will maximize profitability over the
next ten years. An extensive analysis was performed to determine the costs, revenues, and
profits for each alternative. The results are shown below.

Location Ten-year Annual Profit (in million R)

1 0.70
2 0.95
3 0.60
4 0.84
Management has a high degree of confidence in these figures. The decision criterion (profit)
has been explicitly identified and accurately calculated for each alternative. Management's
strategy is to select the alternative with the highest criterion value, in this case, location 2.

EXAMPLE - Decision under conditions of Risk

Further analysis of the supermarket chain's problem reveals that the profit associated with
each location is not known for sure. Management is convinced that the ten-year profitability
of each location will depend upon regional population growth. Therefore management cannot
predict the outcome with certainty. Three possible rates of population growth were identified:
low, medium, and high. The profitability (in million R) associated with each location and each
rate of population growth was calculated, as shown below.

Rate of Population Growth

Medium
Low High
(above 5%
Location (5% or (10% or
but below
less) more)
10%)
1 0.3 0.8 0.9
 2 0.2 0.6 1.1
3 0.4 0.5 0.6
4 0.6 0.7 0.8
Probability (P) 0.2 0.3 0.5
The figures at the bottom of the table give the probability (likelihood) of each rate of population
growth. Decision strategy in this situation is more difficult than it is under conditions of
certainty.
In analyzing this situation, we have to arrange the data differently than we did under conditions
of certainty. The profit for low, medium, and high population growth is listed separately for
each location. Which alternative is best? If population growth turns out to be low, location 4 is
best (R 0.6 million). If growth is medium, location 1 is best (R 0.8 million), and if it is high,
location 2 is best (R
1.1 million). But there is uncertainty with respect to the rate of population growth.
In the analyst's language, the three rates of population growth are called states of nature. As the
three states of nature have different probabilities of occurrences, we apply a procedure called
calculating the expected value in this case. For each alternative location, we calculate the
product of each outcome and its probability. The sum of these products is the expected value
of the alternative location. The expected value is highest for alternative 2: R 0.77 million. If
management faced this situation many times and always chose alternative 2, its average profit
would be higher than for any other alternative.

Calculation of expected value (R million):

Alternative Expected value

Outcome x Probabilities Summation (profit)

1 0.3 x 0.2 = 0.06 0.8 x 0.3 = 0.24 0.9 x 0.06 + 0.24 + = 0.75
0.5 = 0.45 0.45
2 0.2 x 0.2 = 0.04 0.6 x 0.3 = 0.18 1.1 x 0.04 + 0.18 + = 0.77
0.5 = 0.55 0.55
3 0.4 x 0.2 = 0.08 0.5 x 0.3 = 0.15 0 .6 x 0.08 + 0.15 + = 0.53
0.5 = 0.30 0.30
4 0.6 x 0.2 = 0.12 0.7 x 0.3 = 0.21 0.8 x 0.12 + 0.21 + = 0.73
0.5 = 0.40 0.40

EXAMPLE - Decision under conditions of Uncertainty

Even further analysis has cast doubt on the probability of the rates of population growth. New
management doesn't know the probabilities of low, medium, or high growth, and is faced with
a problem under conditions of uncertainty. Obviously, strategy is much harder to come by in
this case.
Problems under conditions of uncertainty can also be structured in matrix form. Since the
probabilities are not known, however, rational strategies for decision-making are not well
defined or straightforward. We discuss three approaches from among several that analysts use.
The first, maximax, is an optimistic approach; the analyst considers only the best outcome for
each alternative regardless of probability. Looking at the table for the risk example and ignoring
the probability row, the outcomes that would be considered are R 0.9 million for alternative 1,
R 1.1 million for alternative 2, R 0.6 million for alternative 3, and R 0.8 million for alternative
4. Among these, alternative 2 yields the maximum profit, and that is the one that would be
chosen.
The second approach is maximin, a pessimistic approach; the analyst considers only the worst
outcome for each alternative and chooses the "best of the worst." In the table in the risk example,
in the outcomes that would be considered are R 0.3 million for alternative 1, R 0.2 million for
alternative 2, R 0.4 million for alternative 3, and R 0.6 million for alternative 4. The best of
these is alternative 4.
The third approach, the principle of insufficient reason, assumes that since we know absolutely
nothing about the probabilities of any state of nature, we should treat each with equal
probability, calculate the expected values accordingly, and choose the alternative whose
expected value is highest. Using this approach, we would choose alternative 4.
CLASSIFICATION OF DECISION METHODOLOGIES
Below given is a classification of decision making techniques available to operations managers.
Some techniques may be suitable for use under more than one condition.

Complete certainty Partially certain and risky Extreme uncertainty

(all information is assumed to be (Some information is available) (No information)
available)
Algebra: Statistical analysis: Game theory
Break even analysis Estimation & test of hypotheses Flipping coin
Benefit/cost analysis Regression and correlation
Multivariate analysis
Calculus Queuing theory
Mathematical programming: Simulation
Linear Heuristic models
Nonlinear Network analysis
Integer Decision trees
Dynamic PERT/CPM
Goal Utility theory

In the recent days there has been a great inclination among business firms to use quantitative
methods to arrive at good decisions, especially, mathematical and statistical techniques. Some
examples of Economic models, Statistical models and Decision support systems are discussed
below.
Decision Support System (DSS): This is an information system to aid decision making.
Although it has been in existence for a long time in the form of manual recording, storage,
analysis and retrieval of data and information, these days it is supported by computers,
peripherals and communication networks in order to enable effective decision making at all
levels. Computers are of a big help especially in generating and evaluating alternatives.
However, it is the manager who has to take decisions and not computers. It is strongly suggested
that the manager shall condition the outcome of analysis with his judgment, experience, and
skills before arriving at a decision and committing resources. Occasionally, the DSS may also
involve expert systems.

Economic Models:
(i) Break-Even Analysis (BEA) :
This technique helps us to determine the volume of business operation at which the total costs
become equal to the total revenue. i.e. no profit or no loss situation. For any investment, it is
important to know the BEP vis-à-vis level of market demand and thus the safety margin of
operation.
At BEP, total revenue = total cost
Total revenue = total fixed cost + total variable cost
(Price/unit) * volume at BEP = total fixed cost + (variable cost/unit) * volume at BEP
P * VBEP = FC + VC* VBEP
Hence, VBEP =FC/(P-VC)
As (P-VC) is known as contribution margin from the unit sold, we have,
VBEP =FC/Contribution margin
TR

TC

enu
e
Cost and Rev
TFC

BEP

Quantity of output

Break-Even Chart

The advantages of BEA are that (i) it is very simple to understand, (ii) it addresses profitability
of an investment which is very important, (iii) it allows quicker manipulation of the model and
easier sensitivity analysis.
Its limitations include it assumes that all data (costs, price and volume) are known and certain.
It further assumes linear relationships between variables (e.g. volume sold and total revenue)
and that all output can be sold. It is useful for only one product business. It assumes that variable
and fixed cost elements can be separated.
Problem. 2. For an existing product that sells at P = Rs. 650/- per unit, FC = Rs. 82,000/-
and VC = Rs. 240/- per unit. Determine (i) the BEP and (ii) volume needed to earn a profit
of Rs. 10,250/-.
 Solution. (i) VBEP = FC /(P-
VC)
= 82,000/(650-
240)
= 200 units
(ii) Vfor profit of 10,250 = (FC+ 82,500) /(P-VC)
= (82,000+10,250) / (650-240) = 225 units
Problem 3. A producer of digital watches sells his product at Rs. 30 each. The production
costs at volumes of 10,000 and 25,000 units are as follows. Using the data prepare a break-
even chart and determine the BEP.
Item 10,000 units 25,000 units
Labour Rs. 60,000 Rs. 1,00,000
Materials 1,20,000 2,00,000
Overheads (FC+VC) 90,000 1,10,000
Selling and 50,000 60,000
administration
Depreciation and other 80,000 80,000
FC
Total 4,00,000 5,50,000

Solution. In the following figure, we know that the slope (change in Y/Change in X) of the total
cost line represents the variable cost/unit.

5,50,000
∆Y
4,00,000

Cost and Revenue ∆X

10,000 25,000

Quantity of output
VC = (Change in Y/Change in X) = ∆Y/∆X
= (5,50,000 - 4,00,000) / (25,000 - 10,000)
= Rs.10 per unit
At volume of 10,000 units, total variable cost = 10 * 10000 = Rs.1,00,000
 Hence, at that volume, total fixed costs = total costs - total variable costs
Rs. 4,00,000 – 1,00,000 = 3,00,000
We know that BEP = FC/(P-VC)
3,00,000 / (30-10) = 15,000 units
Problem 4. A company has 30 employees and handles 1500 loads per year of grain from
a warehouse. The firm has fixed costs of Rs.70,000 per year and variable costs of Rs. 170
per load. The firm is considering installing an Rs.80,000 automated material handling
system that will increase fixed cost by Rs.20,000 per year but will increase the per unit
contribution of each load by Rs.20. The firm operates 250 days per year and receives an
average of Rs.300 revenue for each load passed through the warehouse. Determine the
current annual profit or loss. What is the new BEP volume if the investment is made?
Solution:
(i) Current annual profit = total revenue – total cost
= (1500 loads * Rs.300 per load) – [70,000 + (1500 loads * Rs.170 per load)]
= 4,50,000 – 3,25,000 = Rs.1,25,000

(ii) New BEP if the investment is made

VNew BEP = New FC /( New contribution margin)
= (70,000 + 20,000) / (130+20) = 600 loads
 Question Bank

Sl Question
no
1 Briefly describe the term Operations Management. Identify the three major functional
areas of business organizations and describe how they are interrelate.
2 What do you understand by the term operations management? Discuss the historical
revolution of operations management
3 What is operations management? Explain the working of operations management
system with the help of a block diagram
4 How production systems are classified? Explain with examples.
5 What do you understand by productivity? List and explain the steps involved to
improve the productivity
6 Define productivity. What are the factors that affect productivity? Explain briefly
7 (a) A health club has three employees who work on lead generation. Each
employee works 40 hours a week and is paid Rs 200 an hour. Each employee
identifies an average of 400 possible leads a week from a list of 8000 names.
Approximately 15% of the leads become members and pay a one time fee of
Rs 1000. Material costs are Rs 1,300/ week and overhead costs are Rs
1,000/week. Calculate the multifactor productivity for this operation in fees
generated /Rs of input.
(b) What is productivity? What are the different types of productivity? Explain
with necessary formulae.
8 (a) The manager of a crew that installs carpeting has tracked the crew’s output
over the past several weeks, obtaining these figures

Compute the labor productivity for each of the weeks on the basis of your
calculations. What can you conclude about crew size and productivity?
(b) Explain the different ways to improve the productivity.
9 What are the steps involved in systematic decision making process? Explain each step
10 What are the types of models used in decision making process and in which
situations you use these models? Explain.
11 (a) List and explain the characteristics of operations decisions used to select a
model
(b) Explain the role of operations manager in detail with the help of various
approaches
12 Explain the various decision making techniques
13 Explain the whole process of decision methodology based on information available
14 (a) What do you understand by the term Break Even Analysis? What are the
assumptions made before analysis?
(b) What is BEP? Derive the expression for the same
15 A manager has the option of purchasing one, two and three machines. Fixed costs and
potential volumes are as follows.

Variable cost is Rs 10/unit, and revenue is Rs 40/unit.

(i) Determine the break-even point for each range
(ii) If projected annual demand is between 610 units, how many machines
should the manager purchase?
16 The owner of old fashioned bakery is contemplating adding a new line of burgers,
which will require leasing new equipment for a monthly payment of Rs 50,000.
Variable costs would be Rs20/ burger and burger would retail for Rs 50 each.
(i) How many burgers must be sold in order to break even?
(ii) What would the profit (loss) be if 1,000 burgers are made and sold in a
month?
(iii) How many burgers must be sold to realize the profit of Rs 30,000?
(iv) If 2,000 can be sold and a profit target is Rs 40,000, what price should be
charged per burger?
17 Potential locations in Ahmadabad, Bengaluru and Chennai have the cost structures
shown below for a product expected to sell for Rs 130.
(i) Find the best economic location for an expected volume of 6000 units/year
(ii) What is the expected profit if the selected option is used?
(iii) For what output range, which location is best?
 PRODUCTIVITY

TABLE : Some examples of different types of productivity measures

TABLE: Some examples of partial productivity measures

1
Numerical #1

Solution:

2
Numerical #2

Solution:

Numerical #3

Solution:

3
Numerical #4

Solution:

Numerical #5

Solution:

4
Numerical #6

Solution:

5
ASSIGNMENT QUESTION #1

ASSIGNMENT QUESTION #2

ASSIGNMENT QUESTION #3

A company that makes shopping carts for supermarkets and other stores recently purchased some
new equipment that reduces the labor content of the jobs needed to produce the shopping carts.
Prior to buying the new equipment, the company used five workers, who produced an average of
80 carts per hour. Workers receive $10 per hour, and machine cost was $40 per hour. With the
new equipment, it was possible to transfer one of the workers to another department, and
equipment cost increased by $10 per hour while output increased by four carts per hour.
(a) Compute labor productivity under each system. Use carts per worker per hour as the measure
of labor productivity.
(b) Compute the multifactor productivity under each system. Use carts per dollar cost (labor plus
equipment) as the measure.
(c) Comment on the changes in productivity according to the two measures, and on which one
you believe is the more pertinent for this situation.