GENNER A.

RAZ
SECTION 6

Production Management
Midterm Exam

1. Based on this data, is it economical for AMG Company to buy the product from
market or manufacturing plant.

A. Sales Forecast (UNIT) 300,000 500,000 700,000 900,000 1,000,000

B. Manufacturing Cost (Rs)
Salary
Supervisor (/Month) 5,000.00 5,500.00 6,050.00 6,655.00 7,320.00
Supervisor (/Unit) 0.20 0.13 0.10 0.09 0.09
Indirect Worker (/unit) 2.00 1.80 1.80 1.98 2.18
Direct worker (unit) 4.00 3.60 3.60 3.96 4.36
Others
Material (/unit) 14.00 15.40 16.94 18.63 20.50
Power & fuel (/unit) 2.00 2.20 2.42 2.66 2.93
Machine depreciation 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Machine depreciation (/unit) 3.33 2.00 1.43 1.11 1.00
Total Cost/unit 25.53 25.13 26.29 28.44 31.05

C. PURCHASE COST (Rs)

Component (/unit) 20.00 20.00 22.00 24.20 26.62
Transport (/unit) 2.00 2.20 2.40 2.60 2.80
Inventory (/unit) 1.00 1.00 1.10 1.21 1.33
Total Cost/unit 23.00 23.20 25.50 28.01 30.75
D. DIFFERENCE C-B (Rs) (2.53) (1.93) (0.79) (0.43) (0.30)

Answer: the cost analysis shows that there’s cost savings if valves were purchased
from market instead of manufactured in-house. So, for the next five years, it is
economical for AMG Company to purchase from market.

2. What other factors should AMG Co. consider for making decision?

Answer: While cost is an important consideration in making business decisions,

several other factors also have to be looked at by AMG Company:
 Overall objective
 Financial
 Forecast
 In-house improvements
 Control
 Past performance
 Workers availability
 Dependency
 Technology copied
 Offshore outsourcing
  Space availability and land acquisition
 Contract

While business decisions can be either easy or complex, making an informed

decision will mitigate the adverse effects and risks faced by the company. Timely
decision making crucial to avoid loss of business opportunities