Steps to Gain the Maximum Profit for the Production of the Hi-Grade Petrol - Example

Assignment Texxon The production of the oil is done with the mixture of different types of crudes. The requirements of the crude that are to be used in order to produce the required orders and the other orders those are to be produced. The cost per barrel of each type of crude is shown in the table below: Type of crude Shipment amount (barrels) Cost of Shipment ($) Cost Per Barrel ($) A 12,000 1,125,000 93.75 B 15,000 1,068,750 71.25 C 15,000 1,012,500 67.5 D 12,000 1,080,000 90 E 15,000 1,181,250 78.75 With cost per barrel of each type of crude determined the required amounts of barrels of Crude that are to be utilized in order to produce the ordered quantity are: Products Quantity Required A B C D E Standard 20,000 2,800 5,000 4,400 2,800 5,000 Super 6,000 1,200 1,200 1,200 1,080 1,320 Hi-Grade 14,260 3,565 2,139 1,711 3,565 3,280 Required Barrels 7,565 8,339 7,311 7,445 9,600 The quantity of the required barrels of the crude in order to produce the required order is available and feasible. The remaining amounts of the crudes that are available are: Type of crude Shipment amount (barrels) Utilized Remaining A 12,000 7,565 4,435 B 15,000 8,339 6,661 C 15,000 7,311 7,689 D 12,000 7,445 4,555 E 15,000 9,600 5,400 The remaining amounts of crudes are to be utilized in order to produce the Hi-Grade, as this is the most profitable oil for the company. With the remaining amount of the crudes the production of Hi-Grade oil, which can be produced, are 29,780 barrels. The amounts of each petrol that is to be produced in order to get maximum profit is: Standard Super Hi-Grade 20,000 6,000 29,780 In order to gain the maximum profit the production of the Hi-Grade petrol shall be done with the remaining quantity of crudes that are left after fulfilling the ordered quantity demanded. The maximum profit margin is the reason of producing Hi-Grade petrol from the left over quantities. The cost of production for each of the petrol shall be: Products A ($) B ($) C ($) D ($) E ($) Total Cost ($) Standard 262,500 356,250 297,000 252,000 393,750 1,561,500 Super 112,500 85,500 81,000 97,200 103,950 480,150 Hi-Grade 697,969 318,274 241,218 670,050 539,390 2,466,901 With the total cost of each of the petrol calculated, the maximum profit that can be gained is as below: Products Quantity Produced Total Cost ($) Profit Margin ($) Standard 20,000 1,561,500 1,065,879.90 Super 6,000 480,150 384,120 Hi-Grade 29,780 2,466,901 2,220,210.68 Total Profit Margin 3,670,210.58 The margin of profit is much crucial for the company and the company shall consider the most viable and most benefiting option where the margin of profit is at its maximum. The highest rate of profit is provided by the production of Hi- Grade oil and thus after fulfilling the requirement of the order the remaining crudes are utilized for the production of Hi-Grade petrol. The costs analysis and the profits that shall be gained from the production and the sale of said quantities of the specific petrol will provide the total profit of 3.6 million dollars. With the maximization of the profit after the production of required amounts the company shall be able generate enough profit so as to acquire and/or enhance the resources that the company possesses. The production of the petrol shall allow the company the company to enter into the contract where 14,260 barrels of Hi-Grade petrol is to be provided. The company is producing total of 29,780 barrels of petrol of Hi-Grade petrol and the ordered quantity is 14,260 barrels, which elaborates that the company is producing 15,520 barrels of Hi-Grade petrol, which can be utilized in order to enter the contract of providing 14,260 barrels of Hi-Grade petrol. The cost of the production of the barrel of each grade is determined in the following table: Products Quantity Produced Total Cost ($) Cost Per Barrel ($) Standard 20,000 1,561,500 78.075 Super 6,000 480,150 80.025 Hi-Grade 29,780 2,466,901 82.8375 With the costing of each of the grades of petrol that the company produces the company shall be able to determine the better utilization of the resources so as to enhance the company operations. The per barrel cost of production of the different grades of oil determined above is calculated by dividing the total cost of the production by the quantity produced and thus providing the cost of barrel. Olympic Estate Construction (OEC) For the OEC it is important and vital to take advantage of the outcome of the report from the expert and determine the probability of investing in the plans that the company has decided. It shall cost the company 200,000 dollars but the expert opinion shall be able to make the forecast of the company’s prediction in a much suitable and realistic manner. Although the prediction is about the future but with proper forecasting of market trend the favorable and the unfavorable conditions can be better understood by analysis of the market from an expert especially in the case of real estate (Tzu-Chin & Hsiao-Yen, 2012). With the estimation of the market conditions predicted positively the decisions of the company management shall be convenient and easy based upon the reliability of the information (Gail, et al., 2011). The decision tree for the company as shown above is elaborately displaying the decisions that the company needs to consider in order to carry on with the project. From the start the diagram takes the company towards the decisions that it needs to take in order to carry out the decisions that it needed in order to reach the final decision of choosing the construction that the company should do in order to earn maximum profit. The first decision that the company needs to take is to whether acquire the services of an expert in order to determine the future of the conditions prevailing in the market in the future. The market conditions are better determined by exploring the past trend and forecasting it upon the foreseeable future so as to determine the market conditions of the market in the future. It is highly beneficial for the company to take the expert advice and services so as to better and reliably measure the future market conditions. The expert opinion in this case shall cost the company total value of $ 200,000 but it will be much beneficial for the company to determine the information much more reliably. Thus the services of the external expert shall be taken so as to go to the next step of the plan (John & Jaesun, 1996). The expert opinion shall be the basis of the decision making in the company as the analysis shows that the market shall be strong, the probability of which is 80%. There are only 20% chances that the market shall be weak in the future. Thus upon the characteristics and the results of the market survey and the opinion of the expert it is better taken that the market shall be performing strongly and there shall be a strong demand of tenants in the future. The company in order to seek maximum profit shall go for the option where the profit of the construction is maximum, thus generating much more benefits for the company. The option that is to be taken shall be to build a large park of 270 units. For the management of the company it is necessary to consider the maximization of the shareholders’ wealth and thus the company seeks and goes for the projects that are most beneficial for the company whether financially or non-financially (Dockey, et al., 2000). The uncertainty of the market conditions is one of the important factors to be considered in order to progress in the decision-making of the company (Paul, et al., 2004). The market analysis done by the company expert displays that the probability of the market being strong is 52.7% and that of the market being weak is 47.3%. Based upon such information the decision-making regarding the construction project will be much difficult as there is not much difference in the percentages. The provided percentages shall get the decision maker indifferent and will not succeed in decision-making and thus the decision shall not be able to be much effective as there are appropriately equal probabilities that the market shall be weak or strong. In ascertaining the market conditions it is necessary to account for the risks involved in the market and mitigate it to minimum (Sameer, et al., 2009). The expert opinion and advice shall be able to mitigate this risk to a certain extent and shall be able to provide information that is beneficial and important for the decision-making. The inclusion of the risk involved in the uncertainty of the market conditions in the expert opinion that is acquired from the expert shall be able to provide better decision-making information and thus ease out the process (Marcus, 2010). The expert opinion provides a better picture of the market and it is ascertained the probability of the market of being strong in the future is 80% and that of being weak is 20%. The probabilities of the certainty of the market determined and provide in the expert report leans towards the market being efficient. The market conditions are bettered judged and determined by the expert and thus the information provided by the expert is worth accounting for. There is a risk involved with the expert opinion as to its reliability but that is to be taken so as to determine the possibility of the market conditions reliability the report provides. The predicted profit that the company shall be making from this strategy is: Particulars Amount ($) Profit 7,800,000 Less: expert advice cost (200,000) Net Profit 7,600,000 The company shall be making a profit of 7.6 million dollars when it takes the expert advice and continue with the plan of constructing a large park of 270 units. However if the company choses not to take the expert decision then the decision shall be to build a small park of 90 units. As the market conditions are not much satisfactory in this case and it cannot be determined whether the chances of market being strong are more or less than the chances of market being weak. Thus the risk adverse decision (Martin, 2013) is taken where the company shall be able to make the profit of 2 million dollars even if the market is weak and if the market is strong then the company shall be able to earn the profit of 2.4 million dollars. References Dockey, E., Herbert, W. & Taylor, K., 2000. Corporate governance, managerial strategies and shareholder wealth maximization: a study of large European companies. Managerial Finance, 26(9), pp. 21-35. Gail, S.-W., Douglas, H. & Ian, H., 2011. Strategic thinking and decision making: literature review. Journal of Strategy and Management, 4(3), pp. 238-250. John, K. C. & Jaesun, P., 1996. Seeking Expert Advice for Better Performance: A Study of Small U.S. Export Firms. Management Research News, 19(11), pp. 1-12. Marcus, D., 2010. Risk management in a pure unit root. Journal of Risk Finance, 11(2), pp. 224 - 234. Martin, R. H., 2013. Risk aversion in family firms: what do we really know?. Journal of Risk Finance, The, 14(1), pp. 49-70. Paul, H., Abraham, Y. N. & William, J. D., 2004. The role of project target clarity in an uncertain project environment. International Journal of Operations & Production Management, 24(12), pp. 1269 - 1291. Sameer, K., Anthony, K. & Chandan, M., 2009. Risk mitigation in offshoring of business operations. Journal of Manufacturing Technology Management, 20(4), pp. 442 - 459. Tzu-Chin, L. & Hsiao-Yen, C., 2012. How do appraisers absorb market information in property valuation?: Some experimental evidence. Property Management, 30(2), pp. 190-206. Read More