The National Institute of Engineering

Founded: 1946 [ (A Govt. Aided Autonomous Institution),

1 Affiliation: Visvesvaraya Technological University]

Vision Mission
To impart state-of-the-art engineering education
NIE will be a globally acknowledged institution
providing value based technological & through strong theoretical foundations and practical
educational services through best-in-class people training to students in their choice of specialization
To create new knowledge through innovation and
and infrastructure
cutting-edge research in science and engineering
To provide a platform for inclusiveness and
collaboration by following ethical and responsible
engineering practices for long-term interaction with
academia and industry
To encourage entrepreneurship and to develop
sustainable technologies for the benefit of global
society

Programmes: NIE offers 7 Bachelor, 11 Master’s and 5 Post-graduate Diploma programmes and has 13 Centres of Excellence.
The student strength is about 3500. Many funded research projects of Central and State Governments, VTU, ISRO and
McMaster University amounting to about Rs. 700 lakh are presently carrying out at NIE.
 Address: Mananthavadi Rd, Vidayaranya Puram, Mysore-570 008 Karnataka State, INDIA,
(O), Telefax: 0821-2485802 Phone:0821- 248 0475
 Department of Mechanical Engineering
2

Vision Mission
The Department of Mechanical Engineering will The Department of Mechanical Engineering is
mould globally competent engineers by imparting committed to:
 Provide a strong foundation in mechanical
value based technological education through
contemporary infrastructure & best in class engineering to make our engineers globally
competitive.
people
Inculcate creativity in developing solutions to
mechanical engineering problems by adopting ethical
and responsible engineering practices.
 Creating centres of Excellence to provide students
with opportunities to strengthen their leadership &
entrepreneurial skills and research proficiency.
Building relationships with globally acknowledged
academic institutions and industries.

The Department of Mechanical Engineering was established in the year 1958 and the first batch of B.E. graduates moved out of the portals of NIE in the year 1963. 
Undergraduate course: [Bachelor of Engineering] B.E. degree(Mechanical Engineering): – 4 years duration Intake- 60*3=180
Post Graduate courses for M.Tech* Product Design and Manufacturing: 2 years duration (run by VTU)
Industrial Automation and Robotics : 2 years duration
Nano Technology : 2 years duration
Machine Design : 2 years duration
M.Sc. (Engineering):by Research, Doctoral Program [Ph.D],
Short term courses: in CNC, CAD-CAM, Robotics and Finite Elements Method, UniGraphics.Etc. for employed Degree and Diploma Holders and Engineering students.
 OPERATIONS MANAGEMENT (3-0-0)

Sub Code : ME7E204 CIE : 50 %

Hrs / Week : 03 SEE : 50
SEE Hrs : 3 Hrs %
Max. Marks: 100
Course Instructor:

Dr. Yogesh. K. K.
B.E, M.Tech, Ph.D( IITR),
Associate Professor
Department of Mechanical Engineering
The National Institute of Engineering
MYSORE - 570008,
KARNATAKA
3
 Time Table

Days ‘A’ section

/Timings [405]

Mon 10.00

Tue -------------

Wed 10.00

Thu .---------

Fri 9.00

Sat -----------
4
 Course Content
Module - 1
Operations Management Concepts: Introduction, Historical Development, Operations Management
Definition, and Framework for managing operation, The trending operation management Products v/s
Services, Productivity, Factors affecting Productivity, International Dimensions of Productivity, Scope of
operations management.
Operations Decision Making: Introduction, Characteristics of decisions, framework for Decision Making,
Decision methodology, Decision support system. Concept and Numerical problems on economic model
(BEA), Decision tree analysis.
SLE: Trending in manufacturing industries 8 hrs

Module – 2
System Design and Capacity Planning: Introduction, System configuration, Manufacturing and Service
system, Design capacity, System capacity, capacity planning, investment decisions and Numerical problems
Facility Location and Layout: Introduction, Need of selecting a suitable location, factors influencing plant
location, Location Planning for Goods and Services, Foreign locations, Objectives of the good plant layout.
Facility layout, Classification of layouts, Analysis and selection of layouts, Minimizing cost in job shop layout.
SLE: Assembly Line balancing 7hrs 5
 Course Content
Module – 3
Demand Forecasting: Nature and use of forecast , Forecasting time horizon, short and long range forecasting, sources of
data, demand patterns, forecasting models: qualitative forecasting techniques, quantitative forecasting models- linear
regression, moving average, exponential smoothing, Numerical problems.
SLE: Forecasting as a planning tool 8hrs
Module – 4
Aggregate Planning and Master Scheduling: Introduction to Planning and Scheduling, Objectives of Aggregate
Planning, Aggregate Planning strategies and Methods, transportation model for aggregate planning. Objective and
concept of the Master Scheduling, Master Scheduling Methods, Numerical problems
Material and Capacity Requirements Planning: Inputs and outputs of MRP system, BOM, MRP logics, introduction to
CRP and ERP.
Modern production management tools: Just in time manufacturing: overview of JIT, basic elements of JIT, Benefits of
JIT, universal problem solving sequence, Push/Pull production. Japanese manufacturing Techniques: In brief Kanban,
Poka yoke and kaizen.
8hrs
6
SLE: Capacity Management.
 Course Content

Module – 5
Scheduling and Controlling Production Activities: Introduction ,scheduling strategy & guidelines,
Scheduling methodology, concept of single machine scheduling, measure of performance, SPT,
WSPT rule, EDD rule, minimizing nos. of tardy jobs. Flow shop scheduling: Johnson algorithm’s’ jobs
on ‘2’ and ’3’ machines, Gantt chart, CDS heuristics. Job shop scheduling: Scheduling ‘2’ jobs on ‘M’
machines.Numerical problems. 8hrs
SLE: Gantt Chart

7
Text Book:
1. Operations Management by B. Mahadevan, Theory and practice, Pearson education, second
edition-
2007.

Reference Books:

1. Operations Management by I. Monks, J.G., McGraw-Hill International Editions, 1987.

2. Modern Production/Operations Management by Buffa, Wiley Eastern Ltd, Year 2007
3. Production and Operations Management by Pannerselvam. R.,PHI, Year 2012
4. Productions & Operations Management by Adam & Ebert, Year 2002
5. Production and Operations Management by Chary, S. N., Tata-McGraw Hill, Year 2000
6. JIT manufacturing by M.G. Korgoonkar First Edition, McMillan India Ltd, Year 2003

Assessment Methods:
1. Written Tests (Test 1,2 & 3) are Evaluated for 25 Marks each out of which sum of
best two for 50 marks are taken.

8
 Course Outcomes

Upon successful completion of this course, the student will be able to:
1. Understand role of operation management, the factors affecting productivity
and develop decision support system.
2. Understand the different capacities, facility location and layouts.
3. Analyze different qualitative and quantitative forecasting models.
4. Evaluate different material and capacity requirement planning methods.
5. Understand and solve different job scheduling strategies.
6. Understand the Optimization of time in material logistic process.

9
 Program Outcomes
1. Demonstrate engineering knowledge in the four streams of mechanical engineering, namely, thermal
engineering, design engineering, manufacturing engineering and industrial management.
2. Solve real life problems through the application of engineering knowledge.
3. Design a component, system or process to meet desired needs with realistic constraints.
4. Formulate mathematical models and conduct experiments to analyze the complexities of mechanical
systems.
5. Provide solutions to varied engineering problems using computational tools.
6. Overcome engineering challenges to cater to the needs of the society.
7. Design and manufacture products which are economically and environmentally sustainable.
8. Discharge professional and ethical responsibility considering societal health and safety.
9. Function competently as an individual and as a part of multi-disciplinary teams.
10. Communicate effectively and express ideas with clarity
11. Exhibit professionalism by employing modern project management and financial tools.
12. Possess the knowledge of contemporary issues and ability to engage in life-long learning
10
Mapping of course outcomes with program outcomes

11
 Operations Management
Operations management refers the
 Systematic direction, control, and evaluation of the entire range of processes that transform inputs into
finished goods or services.

Production system: the way a firm acquires inputs then converts and disposes outputs.

Operations managers: responsible for the transformation process from inputs to

outputs.
Outputs
 Joseph G .Monks defines Operations Management as the process whereby resources, flowing within a
Operations
defined system, are combined and transformed by Management (goods
a controlled manner to add value in accordance with
policies communicated by management.
and
services)
Operations Management
Concepts
Operations management seeks to increase the quality, efficiency and
responsiveness of the firm.

• Seeks to provide a competitive advantage.

• Quality: goods and services that are reliable and perform correctly.
• Quality allows customers to receive the performance that they expect.
• Efficiency: the amount of input to produce a given output.
• Less input required lowers cost and waste.
• Responsiveness to customers: actions taken to respond to customer needs.
• Firm can react quickly and correctly to customer needs as they arise.
• PRODUCTION SYSTEM
• 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:

Money
Methods
CLASSIFICATION OF PRODUCTION SYSTEM

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

production systems.
Most of the organizations (including non-profit organization) can be
described as production systems.
These organizations transform (or convert) a set of inputs (such as
materials, labour, equipment, energy etc.) in to one or useful outputs. The
outputs of a production system are normally called products.

These products may be:

(a)Tangible goods (Steels,chemicals etc.)

(b)Intangible services (Teaching,health care etc.)
(c)combination of (a) and (b) (fast food, tailoring etc.)
A Framework of Managing Operations

Managing Operations can be enclosed in a frame of general management

function as shown inFigure.
Planning Organizing
– Capacity – Degree of centralization
– Location – Process selection
– Products & services Staffing
– Make or buy – Hiring/laying off
– Layout – Use of Overtime
– Projects Directing
– Scheduling – Incentive plans
Controlling/Improving – Issuance of work orders
– Inventory – Job assignments
– Quality
– Costs
– Productivity
Historical Development of
OM
Many historical milestones have shaped OM. Some of these are……..
• Industrial revolution Late 1700s
• Scientific management Early 1900s
• Hawthorne Effect 1930s
• Human relations movement 1930s-
• Management science 1940s-
• Computer age 1960s-
• Environmental Issues 1970s-
• JIT & TQM* 1980s-

*JIT= Just in Time, TQM= Total Quality Management

21
Historical Development
con’t
• Reengineering 1990-
• Global competition 1980-
• Flexibility 1990-
• Time-Based Competition 1990-
• Supply chain Management 1990-
• Electronic Commerce 2000-
• Outsourcing & flattening of world 2000-

For long-run success, companies must place much importance on their operations

OM is highly important function in today’s dynamic business environment. Among the

trends with significant impact are just-in-time, TQM, reengineering, flexibility, time-
based competition, SCM, global marketplace, and environmental issues.
22
Products &
Services
Most of the organizations (including non-profit organization) can be described
as production systems.
These organizations transform (or convert) a set of inputs (such as materials,
labour, equipment, energy etc.) in to one or useful outputs. The outputs of a
production system are normally called products.

These products may be:

(a)Tangible goods (Steels,chemicals etc.)

(b)Intangible services (Teaching,health care etc.)
(c)combination of (a) and (b) (fast food, tailoring etc.)
 Product or Service?
• Products are physical items that include raw materials,
parts, subassemblies,
and final products.
• Automobile
• Computer
• Oven
• Shampoo
• Services are activities that provide some combination of
time, location, form or
psychological value.
• Air travel
• Education
• Haircut
• Legal counsel
Production of Goods vs. Delivery of
Services
• Production of goods – tangible output
• Delivery of services – an act
• Service job categories
• Government
• Wholesale/retail
• Financial services
• Healthcare
• Personal services
• Business services
• Education
 Productivity
 GDP (Gross domestic product) growth
 Market capitalization
 Technological infrastructure
 Quality of education
 Efficiency of government
Productivit
y
 Productivity Growth

C u r r e n t productivi t y - P r e v i o u s productivi t y
Productivity G r o w t h = 100%
P r e v i o u s productivi ty

Productivity Growth is a key factor in a

contry’s rate of inflation and the standard of
living of its people
 Exampl
e
Labor productivity on the ABC assembly line was 25units per hour in 2016. In
2017, labor productivity was 23 units per hour. What was the productivity
growth from 2016 to 2017?

23 - 25
Productivity G r o w t h = 100%  8%
25
What determines the productivity growth rate of a
country?
Labor productivity growth comes from increases in
the amount of capital available to each
worker (capital deepening), the education and
experience of the workforce (labor composition),
and improvements in technology (multi-factor
productivity growth).
Key Steps for Improving Productivity

 Develop productivity measures for all

operations
 Determine critical (bottleneck) operations
 Develop methods for productivity
improvements
 Establish reasonable goals
 Get management support (make it clear that
management supports and encourages
productivity improvements.)
 Measure and publicize improvements
 Invest on labor force by training and
education
(Don’t confuse productivity with
efficiency)
Why is Japanese productivity so low?
Domestic service companies over-invested in the past and under-invested in the future.
Japan's productivity growth has been hobbled by inadequate competitive pressure
and a rigid labour market. Competition fuels productivity, as the most nimble and
innovative companies win out over less efficient firms.

Overall, there were only four counties in the world where more than 50 percent of
the population did not get enough exercise: Kuwait, Iraq, American Samoa, and
Saudi Arabia. So these four countries are effectively the “laziest” in the world
Country GDP (PPP) per hour  Rank 2021 Population
Norway $75.08 1 5,465,630
Luxembourg $73.22 2 634,814

Most Productive Countries

United States $67.32 3 332,915,073
Belgium $60.98 4 11,632,326
Netherlands $60.06 5 17,173,099
France $59.24 6 65,426,179

2021
Germany $57.36 7 83,900,473
Ireland $56.05 8 4,982,907
Australia $55.87 9 25,788,215
Denmark $55.75 10 5,813,298
Sweden $55.28 11 10,160,169
Austria $54.83 12 9,043,070
United Kingdom $51.38 13 68,207,116

Canada $50.29 14 38,067,903

Iceland $50.01 15 343,353
Switzerland $49.88 16 8,715,494
Spain $49.59 17 46,745,216
Finland $48.79 18 5,548,360
Barbados $46.19 19 287,711
Italy $45.04 20 60,367,477
Japan $43.77 21 126,050,804
Singapore $41.46 22 5,896,686
Hong Kong $41.30 23 7,552,810
Trinidad And Tobago $40.04 24 1,403,375

Taiwan $39.97 25 23,855,010

Slovenia $39.78 26 2,078,724
Israel $38.99 27 8,789,774
New Zealand $36.83 28 4,860,643
Malta $36.02 29 442,784
Slovakia $33.44 30 5,460,721
Greece $32.77 31 10,370,744
South Korea $32.31 32 51,305,186
Czech Republic $31.23 33 10,724,555

Cyprus $31.18 34 1,215,584

Lithuania $27.53 35 2,689,862
Portugal $27.23 36 10,167,925
Poland $25.81 37 37,797,005
Hungary $24.37 38 9,634,164
Estonia $23.50 39 1,325,185
Turkey $22.83 40 85,042,738
Latvia $21.15 41 1,866,942
Russia $19.70 42 145,912,025
Chile $19.55 43 19,212,361
Saint Lucia $18.58 44 184,400
Uruguay $18.16 45 3,485,151
Costa Rica $17.81 46 5,139,052
Bulgaria $16.48 47 6,896,663
Malaysia $16.47 48 32,776,194
Mexico $16.23 49 130,262,216
Romania $15.46 50 19,127,774
Venezuela $15.05 51 28,704,954
Argentina $13.84 52 45,605,826
Ecuador $13.81 53 17,888,475
Jamaica $12.95 54 2,973,463
Colombia $11.26 55 51,265,844
Peru $10.99 56 33,359,418
Brazil $10.78 57 213,993,437
Armenia $10 58 2,968,127
Thailand $8.54 59 69,950,850
Sri Lanka $6.85 60 21,497,310
India $3.40 61 1,393,409,038

Bangladesh $1.98 62 166,303,498

INTERNATIONAL DIMENSIONS OF PRODUCTIVITY
TREND TOWARDS MORE FLEXIBLE SYSTEMS

The production runs of these higher valued specialty items and custom
designed products are often much shorter than for traditional mass
produced goods. But the non-productive time (downtime)required to set up
equipment for producing different options, new models and new products
are very costly. So production facilities must be designed with the utmost
flexibility to accommodate changeovers in rapid fashion. This is where
computers, robotics come into play.
The scope of operations management ranges across the organization.

The operations function includes many interrelated activities such as:

 Forecasting
 Capacity planning
 Facilities and layout
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 And more . . .
• The operations function
• Consists of all activities directly related to producing goods or providing
services
OPERATIONS DECISION-
MAKING Thousand of business decisions are made everyday. Not all the decisions will make or
break the organisation. But each one adds a measure of success or failure to the operations.
Hence decision making essentially involves choosing a particular course of action, after
considering the possible alternatives.
Decision Making
 Most operations decisions involve many alternatives that can have quite different impacts on
costs or profits
Typical operations decisions include:
 What: What resources are needed, and in what amounts?
 When: When will each resource be needed? When should the work be scheduled?
When should materials and other supplies be ordered?
 Where: Where will the work be done?
 How: How will he product or service be designed? How will the work be done? How will
resources be allocated?
 Who: Who will do the work?
Nine Categories of Operations Management
Decisions

• Product plans
• Competitive Priorities
• Positioning Strategies
• Location
• Technological Choices
• Quality management and control
• Inventory management and control
• Materials Management
•
OM Decisions
All organizations make decisions and follow a similar path
• First decisions very broad – Strategic decisions

• Strategic Decisions – set the direction for the entire company; they are broad
in scope and long-term in nature

• Following decisions focus on specifics - Tactical decision

• Tactical decisions: focus on specific day-to-day issues like resource

needs,schedules, & quantities to produce are frequent
• Tactical and Strategic decisions
46
CHARACTERISTICS OF DECISIONS
FRAME WORK FOR DECISION-MAKING

An analytical and scientific framework for decision implies the following

systematic steps

• Defining the problem

• Establish the decision criteria.
• Formulation of a model.
• Generating alternatives .
• Evaluation of the alternatives.
• Implementation and monitoring.
49
DECISION METHODOLOGY [ Decision
Methods]
The kind and amount of information available helps to determine which analytical methods are
most appropriate for modeling a given decision. Figure 2.2 illustrates some useful quantitative
methods that are classified according to the amount of certainty that exists with respect to the
decision variables and possible outcomes. These analytical techniques often serve as the basis
for formulating models, which help to reach operational decisions.
Decision support
system

59
Decision support systems (DSS)
Decision support systems (DSS) are computer based systems designed to help decision maker at various
stages of the decision making process especially in the development of alternatives and evaluation of
possible courses of action. A large number of computer based analytical tools or software's are available
to help modern day managers to take decisions on various aspects of business. Computers have enabled
decision makers to save time and costs, crunch data, visualization solution better and provide more
alternatives.

CRAFT ( Computer Relatives Allocation of Facilities Technique : used for plant layout
CAN-Q ( Computer analysis of Network of Queues. : Queueing problems
ALDEP ( Automated layout design program) : used for layout design
COMSOLE ( Computer Method for Sequencing of Assembly Lines)
ADAMS ( Simulation of Kinematics Mechanisms)
IMPAS ( Computer aided process planning software)
ESPIRT ( Computer aided part programming)
PREDATOR ( Checking the manual part program)
NASTRAN/ANSYS
/ABACUS/DEFORM/FLUENT: used for finite 60
element analysis
Economic Models
Mathematical and analytical models which address issues of costs,
revenues, profits and losses are economical models.

Decisions on these are fundamental to the survival and continuation of

any business.

Break Even Analysis and contribution analysis are important economic

models widely used in several business areas.

61
62
Break Even Analysis:

The fundamental objective of any business is to maximize profit and minimize losses.
Profit mainly depends upon production costs, sales revenues and volume of output.
Break Even Analysis is a graphical and algebraic representation of the relationships
among these three variables.

It is extensively used model for decision –making by many organizations.

Break Even analysis is also known as cost-volume-profit model.

Total production costs are generally divided into two categories- Fixed costs and
Variable costs. Sales revenue depends upon the volume of output and price per unit
of output whereas volume of output depends upon the sales demand.

63
1. Fixed costs (FC): These costs remain fixed or constant irrespective of the volume of production. They remain
the same whether the production is small. Large or NIL.

Ex. Costs on land and building, Salaries to top management, insurance, depreciation, taxes on property, equipment
etc.

2. Variable Costs (VC): These costs vary with the volume of production. Higher the production, higher will be
the variable costs. In other words, variables costs are the function of volume of output. Variable costs become
zero when production is stopped. Variable costs are also known as prime costs.

Ex. Cost of raw materials, labor, transportation of finished goods. Packing costs etc.

3. Total cost (TC) : It is the final cost involved in the manufacture of a product. It is nothing but the sum of fixed
costs and variable costs.

4. Sales Revenue (SR) : It is the income which comes into the organization through the sales of the products.

Sales Revenue = Total cost + Profit

64
 Break Even Chart

Sales Revenue line

Profit
Cost Profit Region
OR
I Break Even Break Even
n Cost Point Total VC
C Total cost line

O Loss Region

M Margin of safety FC
e Break Even output

Volume of output 65
1) Contribution: It is difference between sales revenue and variable costs for any given
volume of output.,
Contribution = Sales Revenue – Variable costs.
2. Margin of safety : Margin of safety is the horizontal distance between the BEP and the
actual output being produced.

Margin of safety = [ ( Actual sales - Break even sales) / Actual sales ] X 100

3. Angle of incidence ( ) : The angle between the sales revenue line and the total cost
line is called as angle of incidence. A large of incidence indicates large profit and
extremely favorable business positions.

4. Profit volume ratio:

P/V Ratio = [ Contribution / Total sales revenue] X 100
= [ ( Total sales revenue-Total variable costs) / Total sales revenue ] X 100
66
 Calculations of Break-even point ( analytically)

Total costs = F + [v x Q ]
At BEP, Total costs = Total income
F + (v x Q) = s x Q Q = Break –even output
s –v = Contribution per unit.
Q ( BEP) = FC / ( s – v)

BEP = {Fixed costs/ [Contribution / unit of o/p]}

Where as,
F= Fixed costs
Q= Quantity of output produced and
sold s = Selling price per unit of output.
v = Variable price per unit of output
sQ = S = Sales revenue ( income) for quantity
Q vQ = V = Variable costs for quantity Q.

67
 Numerical problems on Economic model
(BEA)

1) If fixed cost for manufacturing a certain products are Rs. 3,00,000 and
variable costs are estimated at 40% of the unit selling price of Rs 100. What
is the quantity of sales at which there is Break-even ?

Ans. Q = 5000 units

2) Process X has fixed costs of Rs 80,000 per year and variable costs of Rs
18
variable
per unit.costs of Rsprocess
Where 48 per unit.
Y hasAtfixed
what costs
production
of Rsvolume
32,000Q per
are year
the total
and
costs of projects X and Y equal ?
Ans : Q = 1600 units.

68
3) Festo India company has its existing product base ( Pneumatic cylinder)
decides to launch a new product priced at Rs 6500per unit. If the fixed cost is Rs
8,20,000 and variable cost per unit is Rs 2400 determine.
a) The BEP
b) The contribution
c) The volume needed to generate a profit of Rs 10,25,000?

Ans : a) BEP = Q = 200 units.

b) The contribution:
Total Contribution = Sales revenue – variable cost = 6500 x 200 – 2400 x 200
= 1300000 – 480000 = Rs 820000.
c) Sales revenue = Total cot + Profit
Profit = Sales revenue – Total cost
10,25,000 = sQ – ( F+vQ)
Q = 450 units.
Thus the additional volume
company has to sell is = 450 –
200 = 250 units. 69
4) A publisher sells a text book priced at Rs 200 each . The production costs for a volume
10000 books are as follows.
Labour = Rs 2,40,000
Materials = Rs 4,80,000
Total over heads = Rs 3,60,000
Selling and admistration = Rs 2,00,000
Interest on capital = Rs 3,20,000
Use the data to draw a break even chart and
determine the BEP.

Ans : From the chart Break even volume  6900 units.

5) Locations A would result in annual fixed costs of Rs 3,00,000, variable cost of Rs

63/unit, and revenues of Rs 68/ unit. Annual fixed costs for location B are Rs. 8,00,000,
variable costs are Rs. 32/unit and revenues are Rs 68/unit. Sales volume is estimated to
be 25000 units / year. Which location is more attractive.
Ans : Break even volume of A = 60000 units
Break even volume of B = 22222
units.
6) A firm has rated capacity of manufacturing 30,000 casting / year. But due to
poor sales it is working at 25% of its related capacity. The expense are as below.

a) Fixed production expense = Rs. 2,70,000

b) Direct production expense = Rs. 62000
c) Variable production expense = Rs 80000
d) Direct labour cost = Rs 52200
e) Fixed sales expense = Rs 30000
f) Variable sales expense = Rs 15000

i) Determine BEP when each unit is sold at the rate of Rs 55

ii)If it is possible to increase the sales to 24000 units / year and selling price reduced to Rs 40 per
unit. What would be the present profit or loss ?
Compare this with the profit or loss in the above case.

iii) What is the new BEP

iv) Obtain the BEP graphically for both cases.

Solution:
Rated capacity = 30000 casting /year
Actual Production = 25 % of 30000 = 7500 casting / year.
Q1 = 7500 c/y
Q2 = 24000 c/y

Total fixed cost = F = Fixed

production cost + Fixed
sales expenses
= 270000
+30000 = Rs
3,00,000
Total variable cost = V =
b+c+d+f =
Sales revenue1 ( at Q1) = S1 = 55 x 7500 = Rs.
62000+80000+52200+150
4,12,500 Sales revenue2 (at Q2) = S2 = 40 x 24000 =
00 = Rs. 209200 For Q1 profit or loss
Rs 9,60,000 = SR1 –TC1 = 4,12,500 – 5,09,200
IFor
) BEP from Graph
Q1 Variable cost per casting = V/Q1 = 209200/ 7500 = 27.89 33 per = -97200
For (Q1
unit. Total cost1 BEV
at Q1 = 11100
7500) = F+Vcasting /y
= 3,00,000 + 2,09,200 For
= RsQ25,09,200
Profit or loss
Total cost 2 ( at Q2 24000) = F + v Q2 = 3,00,000 + (27.8933 x 24000) = Rs = SR2 – TC2 = 9,60,000 – 9,69,439
ii)
969439.2 For Q2 BEV = 24,900 = - 9439
casting /y
 For Q1 profit or loss
= SR1 –TC1 = 4,12,500 – 5,09,200
=Rs -97200
For Q2 Profit or loss
= SR2 – TC2 = 9,60,000 – 9,69,439
=Rs - 9439

@@@@Construct BEC
Conclusion:
Looking at the value . It is concluded that it is loss making both at Q1 and Q2. But
the loss is considerably reduced from Rs -97200 to Rs – 9439 when sales went up
from 7500 to 24000 because of reduction in selling price fro Rs 55 to Rs 40.

65
7) A travel agency has a vacation package that sells for Rs 12,500. Fixed costs are Rs 80
lakhs and the present volume of 1000 customers. Variable costs are Rs 25 lakhs and
profits are Rs 20 lakhs.

a) What is the Break-even point volume

b) Assuming that fixed costs remain constant, how many additional customers will
be required for the agency to increase profits by Rs 10 lakhs.
Ans.

a) Q = F/ (s-v) = 800 customers.

b) SR = Profit + Total cost

12500 x Q2 = (20 lakh s + 10 lakhs ) + ( 80 lakhs + (2500 x Q2)

Q2 = 1100 customers.

 Q2- Q1 = 1100 -1000 = 100 customers.

 We need 100 more customers to increase profit by Rs 10 lakhs.
8) Pizza hut has the following data on costs at two volumes of production for a pizza that sells
at Rs 50.
a) Construct a Break even chart
b) Compute the variable cost, the contribution and the BEP
c) Using the contribution for (b) estimate the profit at a volume of 8000 units.
Labour Materials Overheads Other fixed Total
Rs Rs Rs Rs Rs

6000 units 60000 36000 54000 80000 230000

10000 units 100000 60000 60000 80000 300000

Ans : verify b) Rs 17.50 /unit , Rs 32.5 / units BEP= 3846 units

c) Rs 1,35,000
 Decision Tree Analysis

Decision Tree Analysis is a technique used for taking long-term capacity planning
decision.
A decision tree is basically a diagram used to structure and analysis a decision
problem.

Decision tree analysis is a comparative study of different possibilities occurring due to

decisions take, and arriving at the best possible alternative purely depending on the
probability of occurrence of each outcome and the probable profit or loss of such a
outcome.

76
 Steps in Decision Tree Analysis

1) Tree Diagramming
a) Identify all decision points and the order in which they occur.
b) Identify alternate decisions for each decision point.
c) Identify the chance events that may occur after each decision.
d) Draw a tree diagram showing the sequence of decisions and chance events.

2) Estimation
a) Estimation the probability of each possible outcome of each chance event.
b) Estimate the economical consequence of each possible outcome and decision
alternative.

3) Evaluation and Selection

a) Calculate the expected value of each decision alternative.
b) Select that alternative which offers the most attractive expected value.
77
Decision Tree-Problems:
1) An entrepreneur wants to introduce a new quartz crucible into Indian Market. This product has
an excellent market for the next 5 years. He has three options.
i) Making the crucible by building a large unit.
ii) Making the crucible by building a small unit.
iii) Becoming a trader. Just buy and sell.
The following data are furnished.
Alternative Possibility of Sales Probabilit
demand Revenue/ y
a) Investment Analysis:
Year ( Rs. In
Alternative Investment lakh)
Make in large unit Rs. 60 Lakhs Large Unit High 19 0.7
Medium 10 0.1
Make in small unit Rs. 40 Lakhs
Low 3 0.2
Buy and sell NIL
Small Unit High 16 0.7
Medium 12 0.1
Low 4 0.2
Buy and Sell High 10 0.5
Medium 4 0.3
Low 1 0.2
i) Probable Revenue for :
Chance Event a = { ( 19 x 0.7) + ( 10 x 0.1) + ( 3 x 0.2)} x 5 = (13.3+ 1+ 0.6) x 5
= 74.5
But the revenue above is including the initial investment of Rs 60 lakhs.
 Income for event a = 74.5 – 60 = 14.5 lakhs.

Similarly for b :
Chance Event b = 66 lakhs
Income for Event b = 66 – 40 = 26 Lakhs

Similarly for c:
Chance of event c = 32Lakh.
Income for Event c = 32 Lakhs
Since there is no initial investment for buy
and sell option. The income is 32 Lakhs

Between a and b , b is more profitable,

Between b and c , c is more profitable.

There fore the enterpriser decides to

become a trader.
SLE: Trending in manufacturing industries

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