Introduction – background information
Research is an important component of any market study as the same discloses important information about the market and the business environment to a business organization . In most cases, the main reason to conduct a research in business organizations is to be able to gather a picture of the competitive environment which usually takes into account factors such as presence of competitors, preference of customers in the market, prevailing political, economic, social and technological conditions and a number of other factors . These factors are important from a business point of view as the same help in predicting the challenges and aspects of a business organization.
In this particular case, the focus is on the organization ABC Complete Kitchen which is focusing on introducing operations in Maine, KY. The organization is specialized in the production of kitchen equipment meant to be supplied to kitchen organizations, part of hotels and independent. The organization is specialized in both production and assembling of kitchen equipment, parts of which are procured from suppliers.
The research will be needed to determine the level of productivity in the company. ABC Kitchens is a manufacturing company. Let’s assume that it has a capacity of producing 50 Kitchens per months. The selling price of each kitchen is $800. This means that the average billing for the company is $40,000/moth and $480,000/annum. It has been decided, the earning of the company, and its production will be evaluated against this maximum output. Suppose that the company is using a 1000 sq yards facility for manufacturing its products. It is paying a monthly rent of $1000. Other fixed costs include fixed wages of $10,000, depreciation of machinery used $300/ per annum, insurance will be 3% of the book value of machinery, and $29/month for delivery vehicle. The average workforce for the company is estimated to be 30 people providing an average salary including all benefits and other payment of $11/hour. The annual work hours are 5000 work hours for the company. Estimated electricity costs are estimated to be $25,000/years. The material used in manufacturing of these cabinets is 15% of the billing, and overhead costs are 20% of the billing.
This hypothetical data now can be used for determining the productivity of workers, machinery, and return on capital employed by the company.
The annual billing of the company will be $480,000. It will deduct cost of material from this billing and variable labor cost to arrive at the gross profit. The gross profit of the company will be $480,000 - $72,000 (15% of 480,000) – 55,000 (5000*11). The gross profit of the company will be $353,000. This will mean that the cost of making goods will be around 17%. This is a great margin for any company. The net profit figure will be computed by misusing other expenses from the gross profit figure. The net profit of the company will be $353,000 - $12000 (rent) - $300 (depreciation) – $3000 (insurance 3% of machinery value + 29 * 12 for vehicle insurance) and $96,000 (overheads) $241700. The net profit percentage of the company will be 50%. The company tax expenses will be 40% of the net profit. The taxes that the company pay will be equal $96980. This will leave the company with Net Income after Tax of $144720. If we assume that the company has also taken a loan of $100,000 at 12% per annum from a local bank, then the yearly markup on that loan will be $12000. The company will adjust its markup before the payment of tax. The company’s net profit after tax in this case will be $137820. If we know that the total number of hours the machines have been used is 10,000 hours/ annum, we can assume the labor and machine productivity very easily.
One of the common ratios of productivity is labor productivity. Labor productivity in this case will be number of units produced annual divided by the number of workers. Another aspect of the productivity ratio can be dividing the total number of units produced by the total number of working hours. In the first case, the labor productivity is 6000 kitchens produced by 30 personnel or production worker. This is equal to 200 kitchens per worker. Going deeper into the analysis we found out that total number of working hours in the company are 5000. This will mean that productivity per hours will be a little over one. A kitchen incurs a labor cost of around $1 (hypothetical) figure. If we divide the sales revenue by the number of hours and number of workers employed we will get to know their revenue generation power. The revenue generate per worker is (480,000/30) = $16,000 per worker. If we go by working hours, revenue generated each working hour is (480,000/5000) = $96 per work ours. If these figures have varied over the years, there has been change in the productivity. It has either increased, or decreased. The company can check that from previous year’s records.
Similarly, this productivity analysis can be done for the machinery also. Suppose that the machinery has been used for 6000 working hours. This will mean that each machine has generated a revenue of (480,00/6000) = $30 per hours. Same can be done for the overheads. We know that the total annual overheads for the year were $96,000. We can calculate the total overhead/machine hours by divining 96,000 by 6000. In this case, the answer will be $1600 per machine hours. This calculation will be helpful for the company in determining if there is any variance over the years and will tell if the resources are underutilized or over utilized. On the basis of this, the company will be able take important decision about the resource nd will try to add more productive resource among the mix to improve the overall productivity in the organization. When productivity increases, fixed costs go down and profitability increase. It is what ABC Kitchen should also target if it wants to stay in the business for long.
As it had been mentioned earlier, productivity is an important factor for all business organizations in the industry, and in this case to the kitchen equipment manufacturer, ABC Complete Kitchen. Given the specific business model of the organization in the industry, the leadership needs to be able to identify the key trends and patterns among the producitvity of the organization. It has been seen which are the key areas of information needed for the development of business plans in the organization and how this information can be collected through an effective and well planned productivity analysis. It is highly anticipated that the leadership of the company will make the efforts to put in place the productivity analysis and will try to address the area of concerns for the betterment and the growth of organization. This will make sure that the organization continues to develop and achieve highest possible rates of productivity.
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