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Introduction
This case is concerned with the topic Key factor. It is that factor which limits the volume of
output in the activities of an undertaking, at a particular point of time or over a period. The extent
of the influence must be assessed first so as to maximize the profits. Generally on the basis of
contribution, the decision regarding product mix is taken. It is not the maximizing of total
contribution that matter, but the contribution in terms of the key factor that is to be compared for
relative profitability. Thus it is the limiting factor or the governing factor or principal budget
factor.
Example: - If machine capacity is a limitation, contribution per machine hour is to be
considered for appropriate decision making. Thus profitability can be measured as:
Contribution
Key Factor
The case talks about the rural upliftment program where government has put under cultivation a
farm of 96 hectares to grow tomatoes of four varieties: Royal Red, Golden Yellow, Juicy
Crimson and Sunny Scarlet. In this case there are two limiting factor one is as per the market
requirement the four varieties of tomatoes must be produced with a minimum of 1000 boxes of
each variety. And second one is not more than 22750 boxes of any one variety should be
produced. Based on the limiting factor we have to measure the profitability of the program.
Solution
a.
Here transport cost and harvesting cost per hectare is found out by multiplying with the
Annual Yield because the value is given per box. Similar is the case with the market
price.
Analysis: - Here as per the findings of contribution, rank allocation is as follows:-
Minimum boxes to be produced/ Annual Yield (Boxes per hectare) = 1000/100 =10
Now it is given in the case that out of total 96 hectares 68 hectares are allocated to all the four
varieties and remaining 28 is allocated to the Golden Yellow and Juicy Crimson. So remaining
value of Juicy Crimson out of 28 comes as 18. Similarly we calculate for the other two varieties.
But before allocating these values we have to crosscheck whether minimum 1000 boxes are
produced or not and accordingly we have to do our calculation.
c. Now with the improvement in program i.e. bank has provided a loan of Rs 25000 with a
nominal interest of Rs 1500 per annum to Golden Yellow and Juicy Crimson. Therefore
new fixed cost is
With this improvement, it is also given that there will be a saving of Rs.1.25 per box in
the harvesting cost of Golden Yellow and the 28 hectares will become suitable for growing
Royal Red in addition to the existing Golden Yellow and Juicy Crimson varieties. So by
changing only one value of Golden Yellow we get the contribution as:-
In the above table there is only one change i.e. saving in the harvesting cost of Golden Yellow
which is calculated as 100*(3.28-1.25) = 203. Rest remains the same.
Therefore maximum total profit that would be achieved when the improvement program is
carried out: -
Profit (in Rs) = Contribution – Fixed Cost
PROFIT 28404
Profit
29000
28000
27000
26000
25000
Before Improvement in After Improvement in
program program
Thus it is clearly seen from the graph that as profit is higher we must carry out the improvement
program.