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Shutdown or Continue - Evaluating the Manufacturing Efficiency

Shutdown or Continue - Evaluating the Manufacturing Efficiency
Case Code: CLFIN022
Case Length: 3 Pages
Period: -
Pub Date: 2020
Teaching Note: Available
Price: Rs.150
Organization : Rameshwar Plastics
Industry :Home Appliances & Consumer Products/
Countries : India
Subject: Finance
Shutdown or Continue - Evaluating the Manufacturing Efficiency

Abstract

Rameshwar of Rameshwar Plastics (RP) manufactured and sold three types of High Density Polythylene (HDPE) bucket. After completing one year of manufacturing and production operations, Rameshwar found that buckets of two types – Type-2 and Type-3 – had made losses, while buckets of Type-1 were looking promising in generating sufficient profits. Rameshwar was unable to understand the reason for the losses made by the two types of bucket, as he had studied the market and manufactured the buckets only after finding out that there was adequate demand for the Type 2 and Type 3 buckets.

He was in need of expert advice to decide whether the Type 2 and Type 3 buckets had the capability to generate profits. He wanted to know if he needed to continue to produce the other two categories of bucket (Type-2 and Type-3), or he should stop producing both Type 2 and Type 3 or one of the two. Also, he was in need of advice regarding which type of bucket to produce specifically to improve overall profitability.

The case study can be helpful in understanding the concept of marginal costing, contribution margin, and profit-volume ratio.

Issues

  • Marginal costing and its applications.
  • Criteria to be considered in determining the manufacturing efficiency of a firm.
  • Factors affecting production planning.
  • Relative profitability and its role in the decision-making process.

Introduction

Rameshwar Plastics (RP) manufactured three types of a High-Density Polythylene (HDPE) buckets. During 2019-20, RP sold 140,000 units of the Type-1, 5,000 units of the Type-2, and 1000 units of the Type-3 buckets. The overall profit on the sale of buckets was Rs. 52,96,650. An analysis of the total sales, total costs incurred on manufacturing, selling, and other expenses showed that profit on the sales of the Type-1 buckets was Rs. 64,31,000, while the Type-2 and Type-3 buckets made losses of Rs.499,250 and Rs. 635,100 respectively (Refer to Exhibit-I for the Statement of Manufacturing and Selling Expenses of Three types of Buckets).

Keywords

Accounting, Marginal Costing, Absorption Costing, Contribution Margin, Break-even analysis, Break-even point, Break-even sales, Decision-making involving alternative choices Variable Costs Fixed Costs Profitability Profit Production Planning

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