Programmed Profit Analysis for Sausage Manufacturing

Differences in volume and margins among the various products point up the importance of volume-cost-profit analysis adapted to the particular sausage manufacturing firms. The relationships of the various cost and revenue factors to volume are of extreme importance in determining the profitability of the sausage manufacturer. The individual functional decision areas are closely related to overall volume-cost analysis. For purposes of this study, the functional decision areas considered included: formulation problems, raw material procurement, product line policy, physical facility utilization, interplanting green materials and finished product, gang size for labor hiring, production planning, and the general area of sales policy, particularly distribution and pricing decisions. A normative linear programming model was built to simultaneously consider all the decision areas and alternatives. The analysis was undertaken as a case study to permit incorporation of consistent data in the model. In addition, it permitted building the model around the type of management analysis necessary for it to be useful in an operational setting. The model tested for the case firm contained 727 variables representing activities of the firm and these activities were controlled by 585 constraints. The model was designed as a weekly decision model representing a three-plant firm selling seven major sausage product lines in two major types of markets. The sausage division represented by the model could purchase up to l6 ingredients from job-lot, car-lot, or in-company sources. The firm is generally a price taker in both the product and ingredient markets. traceable variable costs were allocated to the appropriate products, whereas common variable costs are a function of total output. The model was designed to maximize short-run contribution to fixed costs and profit. Maximization of the long-run contribution is the actual objective of the firm and this is considered in setting constraints on the short-run decisions. Four phases were analyzed for tne case firra. The first phase analyzed involved production capacity as the limiting factor. In the second phase analyzed, market sales became the limiting factor, ceteris paribus. The third and fourth phases likewise were limited by market sales as the levels of ingredient and product prices changed. The optimal solutions obtained from the different phases showed changes for the various decision areas. Ingredient procurement sources and quantities of each ingredient used at different plants changed as prices varied. Formulas for products with their associated meat costs varied among plants under a given set of conditions and between time periods at the same plant as conditions changed. Production location also changed under varying conditions even though total production volume remained constant. Closely related to these production shifts were changes in the optimal labor-hiring patterns. Contribution to fixed costs and profit varied widely with changing market conditions. The amount by which estimated profit contribution exceeded the profit objective in the analyses indicated the general magnitude of profit improvement a attributable to use of the model. These figures represented approximately 9 percent increases in contribution to profit above the profit objectives. Use of the model adapted to the individual company's conditions way be expected to result in improved profits through reduction of suboptimality for the company.

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 Record created 2017-04-01, last modified 2017-08-22

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