Car Production Background - Business Decision Making - ثاني ثانوي

Chapter 12 The Car www.ien.edu.sa Production Project Automobiles must improve their average fuel efficiency (the vehicles' kilometers per liter) in order to comply with new government regulations. The company you will work for in this project makes and sells different kinds of motorized vehi- cles, and each has different kilometers-per-liter ratings. In this case, you will use Excel Solver to determine the product mix needed to comply with the new reg- ulations in a profitable way. The Car Production Project will introduce you to the methods used to gather information for decision-making support. Information can come from many sources-it can be internal or external. Information can also be actual or pre- dicted, depending on what type of information is needed. This chapter will focus on identifying the types of information needed can be used in the project's decision-making exercises. Within your project you will begin to explore best- and worst-case scenarios, using the available data to pre- dict likely future outcomes. While there will be variables that you are able to calculate confidently, there will be areas in which the data are projections only. With these forecasts, you will be able to explore various future options. LEARNING OBJECTIVES Once you have completed this chapter, you should be able to: 1 Describe the data gathering process 2 Explain the types of data required for 3 4 5 business decision support Highlight patterns and trends in data to make optimal decisions. Analyze the impact of effective data gathering on business decision making Determine the most likely outcome of the data analysis وزارة التعليم Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 417 The Car Production Project 417 30/06/2023 14:29

QUICK TIP A weighted average is the average of a set of numbers, each with different associated "weights" or values. To find a weighted average, multiply each number by its weight, then add the results. Car Production Background Vehicles with an internal combustion engine burn gasoline for propulsion. In this process, carbon-laden fumes are released out of the tailpipe into the air. This discharge contributes to air pollution. The government requires automobile companies to produce vehicles that are fuel efficient in order to reduce air pollution. A vehicle's fuel efficiency is expressed as its kilometers per liter (KPL)-the distance that can be covered by burning a liter of gasoline in the vehicle's engine. For example, if an automobile needs to burn 10 liters of gasoline in order to cover 100 kilometers, the vehicle's KPL would be 100km/101 = 10KPL. A vehicle that needs 20 liters to cover the same distance would have a KPL of 5 (100km/201 = 5KPL), and would be releasing twice as much carbon. The government's regulations specify that new vehicles must operate at higher KPL levels. The regulation (a rule or law made and enforced by a government) applies to an automobile manufacturer's entire "fleet"-in other words, the KPL standards must be met by the average of its product mix (the range and propor- tions of products made by a company-see Table 3-1). This means that a com- pany may have vehicles with a low KPL if they can balance them with other vehicles that have a higher KPL. If you assume that a company makes and sells 100,000 sedans that have a KPL of 10, and 50,000 trucks that have a KPL of 5, the fleet's average KPL would be a weighted average equal to the following: ((100,000 * 10) + (50,000 * 5)) / (100,000 + 50,000) = 8.33 In the example, if the government's requirement was a fleet average KPL of 8, then the company would be in compliance. But, if the requirement were 10, then the company would have to take steps to come into compliance. The com- pany could work to increase the KPL of its vehicles, or it could decide to make and sell more of its higher-rated KPL vehicles and fewer of its lower-rated KPL models. Or, the company could try some combination of these options. Periodically, the government increases the required KPL; recently it mandated that a car company's fleet average KPL must improve to 16 five years from now. Achieving this fleet average in five years will be a challenge. 418 12 Chapter رة ا Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 418 30/06/2023 14:29

وزارة التعليم Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 419 DEFINITIONS Average: The average (or Mean) of a set of data is a value that is closely representative of the values in the set. It is calculated as the sum of all of the data values divided by the number of values in the set. Weighted average: In a weighted average, each data point value is multiplied by the assigned weight, which is then summed and divided by the number of data points. The company's trucks, SUVs, sedans, and compact cars all have internal combus- tion engines that burn gasoline. The company also makes electric vehicles that are battery powered, and the battery emits no carbon into the atmosphere. When the battery's charge drops very low, a small gasoline-powered engine runs briefly to boost the charge, and some carbon is emitted into the air. The company's engineers have estimated how much it will cost to make and sell each type of vehicle five years from now, and the company has provided selling prices. These values are shown in Table 12-1. TABLE 12-1: Expected selling prices and cost of manufacture in five years Type of vehicle Truck SUV Sedan Compact Electric Selling price Cost of manufacture SAR 225,000 SAR 112,500 SAR 206,250 SAR 105,000 SAR 150,000 SAR 123,750 SAR 112,500 SAR 101,250 SAR 131,250 SAR 138,750 The difference between the selling price and the cost of manufacture is called the gross margin. We can express this as a percentage called the Gross Margin Percentage (GMP = Total revenue minus the Cost of Goods Sold, divided by Total revenue). You can see that the Gross Margin Percentage of trucks ((225,000–112,500)/225,000) x 100 = 50%) and SUVs (49%) are higher than the Gross Margin Percentage of sedans (17.5%), compacts (10%), and electric cars (-6%). DEFINITION Gross margin: The amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. The higher the gross margin, the more capital a company retains, which it can then use to pay other costs or satisfy debt obligations. The Car Production Project 419 30/06/2023 14:29

420 12 Chapter رة ا Ministry of Education 2024-1446 Business Decision Making S1 S2 S3.indb 420 You will notice that the gross margin of the electric cars is initially negative. This is because electric vehicles use new technology, and the initial costs of production are high. The company thinks that in the long run, it will sell more electric cars, which means the average cost of manufacture is expected to decline, the selling price will increase, and the company will eventually make a profit on them. The company's marketing team has estimated how many of each type of vehicle they expect to sell five years from now. The company's engineers will set up the production lines to accommodate this estimate. The maximum annual produc- tion capacities in five years for each type of vehicle are shown in Table 12-2. TABLE 12-2: Expected maximum production capacities in five years Type of vehicle Truck SUV Sedan Compact Electric Max production capacity 30,000 90,000 50,000 20,000 10,000 These engineering capacity estimates are upper limits-they represent the max- imum the company can make and sell of each type of vehicle. Even if customer demand was greater than these numbers, the company only has enough pro- duction lines to make the number of vehicles shown. The company's engineers know how to improve KPL; for example, they can make the engines run more efficiently, use lighter-weight materials in the vehi- cle's body, and streamline the shape of the vehicles for less air resistance. The expected KPLs five years from now are shown in Table 12-3. TABLE 12-3: Expected KPLs in five years Type of vehicle Truck SUV Sedan Compact Electric Expected KPL 10 12 14 20 36 Some small emissions from electric cars are anticipated, depending on how the driver operates the vehicle and manages the battery's charge. The engineers have calculated that the KPL for Electrics is 36. However, the government allow- 30/06/2023 14:29