Business Decision Making - Assignment Example

Higher National Diploma in Business DECISION ANALYSIS Unit 6: Business Decision Making Outcome 4: Use soft ware generated information to make decisions at operational, tactical and strategic levels in an organization TASK 1 Revor plc are urgently planning the production of their new lightweight car battery, the ‘Epsilon’. They would like to exhibit their battery at a trade fair, which is to take place in 48 weeks’ time. Various activities had to take place before production could start, and these are shown in the table below: Task Preceding tasks Duration (weeks) A Clear area - 20 B Commission consulting engineers to design equipment - 2 C Receive consultant’s report B 10 D Place equipment out to tender C 1 E Obtain equipment D 6 F Install equipment A,E 30 G Recruit additional staff C 6 H Train new staff G 4 I Order and obtain materials - 16 J Pilot production run F, H, I 3 K Advertise new product - 2 a. Draw the network and show that it is not possible to start production within 48 weeks. What are the critical activities and how much total float do the non-critical activities have? Solution: It is not possible to start production within 48 weeks because the total duration for the critical activities alone equals 66 weeks which ideally is more than 48 weeks. The critical activities are A, C, F and I. The Total Float for the non-critical activities is: TF = LS – ES =48 – (2 +1+6+6+4+3+2) = 24. b. It is possible to ‘crash’ (i.e., reduce the duration of) certain activities at increased cost. These activities are shown in the table below: Activity Crashed duration (weeks) Normal cost (£000’s) Crashed cost (£000’s) A 18 4 10 E 5 1 3 F 28 15 27 I 8 0.5 8.5 J 2 16 26 i. Ron Smith the Production Manager suggests that only activity I need be crashed because this is the cheapest option and allows the greatest reduction in time to be made. Explain why this would not help the situation. Solution: Of course Ron is right to reason so. Professionally speaking, however, this may not be much of a solution since even with so doing; the total duration required for all the activities to be completed before production can start will still be greater than the expected 48 weeks. It will, therefore, mean that even with that adjustment, the 48 weeks period for production could start will still not be achieved. ii. It has been estimated that for every week over 48 weeks that this project takes, a loss of £8000 is made as a result of lost profits. Decide on the strategy that will minimise the sum of crashed costs and loss of profits. Solution: From the information provided, it appears that critical activities are set to consume a lot of time compared to their non-critical counterparts. In order to minimize the crashed costs, therefore, Ravor plc may be advised to opt to crash the critical activities. Even though it would be argued that crushing the critical activities would mean compromising on the quality of the process, the total loss on profits would outweigh this to a great extent. TASK 2 A paint shop uses 200 tins of paint per day at a fairly constant rate. Tins are now ordered in batches of 1000 when the stock drops below 500. Delivery time is one day. The cost of placing an order is £100. Holding costs are 25p per tin per day. a. You have been asked to examine this policy and make any suitable recommendations to reduce costs. Solution: Consider ordering for tins that last for 10 days @ 200 tins per day; If ordered in batches of 1000, then; Storage costs =£ (.25*1000*2) = £500 Ordering cost = £ (100*2) = £200 Total Cost = £700 If ordered at once, then: Storage costs = £ (2000*.25) = £500 Ordering Cost = £100 Total Cost = £600 Going by the figures calculated above, it would be recommended that the shop considers placing orders in bulk since it is evident that that way, the total costs involved will reduce by a considerable margin. b. The supplier is offering a bulk order discount of 2% off the selling price of £10 for orders above 2000 tins. Advise whether or not they should take up the offer. Solution: Judging from the recommendation made in (a.) above, it is obvious that buying in bulk would significantly lower the total costs as opposed to when orders were placed in batches of 1000. An offer of 2% is even more advantageous since it will cut costs even further. They should, therefore, take the offer. c. What is the minimum percentage discount the shop ought to consider to make it worthwhile to order in quantities of 2000? Solution: The comparison between ordering in batches of 1000 and ordering in bulk (i.e. 2000 and above) clearly leads to the conclusion that even without a discount, buying in bulk would still be cost-effective. The minimum percentage discount that the shop could consider is, therefore, technically zero. TASK 3 Avorcet Ltd. is about to replace some of its existing plant. Two machine configurations have been designed by the production engineering department, C1 and C2. Each configuration involves significant capital outlay with cash benefits forecast to flow in over the next five years. Estimated cash flows C1 C2 $ Outflow (now) (125,000) (140,000) Inflows Y1 30,000 30,000 Y2 35,000 40,000 Y3 40,000 50,000 Y4 40,000 60,000 Y5 40,000 70,000 The plant has no residual value after 5 years and the company’s cost of capital is 15%. Tasks 1. Calculate for each configuration of plant Accounting rate of return Payback period Net present value 2. Analyse the figures you have calculated with your recommendations Solutions: 1. a.) Accounting Rate of Return: For C1: ARR = For C2: ARR = b.) Payback Period: Payback Period= For C1: PP = For C2: PP = c.) Net Present Value: NPV = For C1: For C2: 2. Analysis: Looking at the calculated figures, it is clear that even though Configuration C2 may seem to have an initial investment that is higher than C1 i.e. 140,000; it has a better Accounting Rate of Returns (59.52%), a shorter Payback Period (0.56 years) and a positive Net Present Value (18,316.08) . It would, therefore, be prudent for Avorcet Limited to opt for the second configuration, C2. TASK 4 Discuss and review the use of MIS in the context of decision making at different levels of the organisation. Solution: MIS can be used by an organization to obtain certain information which can be very useful in making decisions. Generally speaking, the advancement in technology has had a significant role in transforming the role of information in any organization. The various ways in which MIS has contributed to decision-making are discussed below: First, the executive use MIS heavily in their day-to-day operations. It is evident that many almost all organizations currently have their managers having computers. Through MIS, there is a continuous flow of information to the executive. It is as a result of this information that the managers are able to make some important decisions regarding organization’s management. Secondly, MIS is extremely important in the operations of an organization. Through MIS, the management is able to make certain decisions with regards to the operations of the organization. Here, the organization can then decide on whether to improve its existing operation systems or even to seek for greener enterprise opportunities. Thirdly, MIS may be used to monitor detect faults in an organization’s system. By so doing, diagnoses are able to be done and the necessary steps taken to ensure that everything goes back to the normal. Finally, MIS is also very critical in human resource management issues. Technically, MIS may be used to provide the necessary information that can be used to help in solving organizational problems that affect the human resource of that organization. In conclusion, therefore, MIS is able to provide up-to date information within the required time. This feature is what makes it possible for organizations to make certain decisions appropriately. Read More