Extra shift decision

These decisions are concerned with whether or not a company should work for 8 hrs, 16hrs, or
24 hrs a day or week day’s only or weekends also. The factors to consider are:
i. Whether the work force would be willing to work extra shifts & if so what overtime or
shift premium they would accept.
ii. Whether extra hours have to be worked just to remain competitive
iii. Whether extra hours would resort in extra revenue or whether there would be in
demand pattern from customers.

>>> Illustration
XYZ currently operates a single production shift which incurs costs and earns revenue stated
below:
 £
Sales (10000 units) 360000
Direct material 120000
Direct labour 100000
Variable O/Hs 20000 (240000)
Contribution 120000
Fixed Cost (90000)
Profit 30000
Profit margin 8.36%

Sales demand exists for an extra 6000 units which can be made in a 2 nd shift at current selling
price. The labor in the 2nd shift will be paid at time & ¼. Additional fixed cost of £10000 will be
incurred but due to the increase in purchase of materials a quantity discount of 5% will be given
on all materials purchased.

Required:
Advise the company on whether to operate the 2nd shift.
TEXT

Solution:
Analysis of Second shift
STUDY

£
Sales (6000x36) 216000
Direct labour (1.25x10000) 125,000
Variable O/Hs (2x6000) 12000

Direct material
Purchase 12x6500 72000
Less discount 5% x 192000 9600 62400
Additional Fixed Cost 10000 209400
Incremental total 6600
Profit margin 3.1%

Decision
Operate the second shift since it results in incremental profits.
3.7.7 Joint product decisions

When a manufacturing Company carries out a process operation in which 2

or more joint products are made from a common process a number of
decision problems can arise. These are:
(1) If the joint product can be sold at existing condition at the split-off
point or after further separate processing, then a decision should be
made on whether to process further.
(2) If extra demand for a joint product exists and not others then it is
necessary to know whether it is worth making more output of the
joint product so as to make a profit on one and dispose off the other.
(3) If it is possible to change the input so as to change the product mix,
then product mix decisions should be made.

Joint Product further processing decisions

In these decisions the relevant costs are the additional costs of further
processing, which should be compared with the incremental revenue of
further processing. The joint costs incurred before the split-off points are
irreverent.

>>> Illustration

TEXT
ABC Ltd produces product A&B from the same process. Joint processing
costs of $150,000 are incurred up to the split off point where 100,000 units of
A and 50,000 units of B are produced. The selling prices for products A and B

STUDY
at the split-off point are $1.25 per unit and $2.00 per unit respectively.
Units of A can be processed further to produce 60,000 units of A + which will incur a fixed
cost
$20,000 and variable cost of $0.3 per unit.

Required
Advice the Company whether to sell product A or product A+

Solution
Incremental revenue $3.25x60,000 -1.25x100,000 $70,000

Further processing costs

Fixed cost 20,000
Variable cost $0.3 x 100,000 30,000 50,000
Incremental profit from further processing 20,000