Leverage

In financing decisions have two components. First, to decide as to how much total funds are needed & second, to decide the sources or their combinations to raise such funds. The total quantity of funds needed, however, depends upon the investment decisions of the firm. Given that the firm has good estimates of how much capital funds are needed, the problem then remains one of determining the best mix of different sources to be used in raising the required funds. The process that leads to the final choice of the capital structure is referred to as the capital structure planning.

CONCEPT OF LEVERAGE:-

The term leverage, in general refers to a relationship between two interrelated variables. With reference to a business firm, these variables may be costs, output, sales revenue, EBIT & EPS. In financial analysis, the leverage reflects the responsiveness or influence of one financial variable over some other financial variable. It helps understanding the relationship between any two variables.

The functional relationship between the sales revenue and the EPS can be established through operating profits (EBIT) as follows:

LEFT HAND SIDE RIGHT HAND SIDE

Sales Revenue EBIT

(-) Variable Costs (-) Interest

Contribution PBT

(-) Fixed Costs (-) Tax

EBIT Profit after tax

The Left hand side of the above presentation shows that the level of EBIT depends upon the level of sales revenue & the right hand side of the above presentation shows that the level of profit after tax or EPS depends upon the level of EBIT.

The relationship between sales revenue and EBIT is defined as Operating leverage and the relationship between EBIT & EPS is defined as financial leverage. The direct relationship between the sales revenue and the EPS can also be established by the combining the operating leverage & financial leverage and is defined as combined leverage.

The basic objective of financial management the maximization of share holder’s wealth requires the maximization of market price of the share by maximizing the EPS.

Priority Rules

• Possible priority Rules

• First come First Served (FCFS) :Jobs are processed in the order in which they arrive at a machine or work center.

• Shortest Processing time (SPT) : Jobs are processed according to processing time at a machine or work center, shortest job first.

• Earliest Due Date (EDD) : Jobs are processed according to due date

• Critical Ratio : Jobs are processed according to the smallest ratio of time remaining until the due date to processing time remaining.

• Slack per operation (S/O) : Jobs are processed according to the average slack time (time until due date minus remaining time to process).

• Rush :Emergency or preferred customer first.

• Priority rules can be classified as either local or global

• Local rules take into account information pertaining only to a single workstation.

• FCFS,SPT,EDD are local rules.

• Global rules take into account information pertaining to multiple workstations.

• Effectiveness of any given sequence is judged using the following performance measures:

• Jobflowtime: length of time a job is at a particular workstation or work center.ie length of time that begins when a job arrive at the workstation and ends when it leaves the workstation.

• It includes not only the actual processing time but also any waiting time to processed,transportation time between operations.

• Job lateness :length of time the job completion date is expected to exceed the date the date the job was due or promised to a customer.

• It is the difference between the actual completion time and the due date.

• Make span :total time needed to complete a group of jobs from the beginning of the first job to the completion of the last job.

• Average number of jobs: Jobs that are in a shop are considered to work in process inventory

• Average number of jobs = total flow time / Make span

Line balancing and plant capacity

Sequencing Jobs through two work centers:

• Johnson’s rule : is a technique that mangers can use to minimize the make span for a group of jobs to be processed on two machines or at two successive work centers.

• It also minimizes the total idle time at the work centers.

• For the technique to work several conditions must be satisfied:

• 1.Job time must be known and constant for each job at each work center.

• Jobtime must be independent of the job sequence.

• All jobs must follow the same two step work sequence.

• Job priorities cannot be used.

• All unit in a job must be completed at the first work center before the job moves on to the second work center.

• Determination of optimum sequence involves the following steps

• List the jobs and their times at each work center.

• Select the job with the shortest time.if the shortest time is at the first work center schedule that job first, if the time is at the second work center schedule the job last.

• Eliminate the job and its time from further consideration.

• Repeat steps 2 and 3 working toward the center of the sequence and all the jobs have been scheduled.

• When significant idle time at the work center occurs job splitting at the first work center just prior to the occurrence of idle time may alleviate some of it and shorten throughput time.

Plant Capacity:

• Capacity can be defined as products or productive resources per a particular unit of measure.

• Capacity can be defined as a measure of the ability to produce or serve that is having enough worker or equipment time to do the job.

• Capacity utilization is a measure that should indicate to what degree he potential capacity is used.

• Utilisation =Number of direct productive hours per

• day

• -------------------------------------------------------

• Total number of scheduled hours per day

Line balancing:

• The process of assigning tasks to workstations in such a way that the workstations have approximately equal time requirements.

• This minimizes the idle time along the line and high utilization of labor and equipment.

• Idle time occurs if task times are not equal among workstations;some stations are capable of producing at higher rates than others.

• Lines that are perfectly balanced will have smooth flow of work as activities along the line are synchronized to achieve maximum utilization of labor and equipment.

• The major obstacle to attaining a perfectly balanced line is the difficulty of forming task bundles that have the same duration.

• The major obstacle to attaining a perfectly balanced line is

• difficulty of forming task bundles that have the same duration.

• Cause of difficulty is that differences among elemental task lengths cannot always be overcome by grouping tasks.

• Required technological sequence may prohibit otherwise desirable task combinations.

• Cycle time : the maximum time allowed at each workstation to complete its set of tasks on a unit.

• Minimum cycle time is equal to the longest task time and the maximum cycle time is equal to the sum of task times.

• Output rate = Operating time per day

• -----------------------------

• Cycle time

• Minimum number of stations=sum of time /cycle time

Scheduling

• Scheduling : establishing the timing of the use of equipment ,facilities, and human activities in an organization.

• Scheduling operations

• 1) Scheduling in High Volume systems

• High volume systems are characterized by standardized equipment and activities that provide identical or similar operations on customers or products as they pass through the system.

• Flow systems : High volume system with standardized equipment and activities.

• Major aspect in flow system is line balancing.

• Scheduling for the flow system is known as Flow shop Scheduling

• Success of flow system depends on Process and product design,preventive maintenance,minimization of quality problems, reliability of timing supplies.

• 2)Scheduling in low-volume systems

• Products are made to order and orders usually differ considerably in terms of processing requirements,material needed ,processing time and processing sequence and set ups.

• Job-shop Scheduling : scheduling for low volume systems with many variation in requirements.

• Job shop processing give rise to two basic issues for schedulers:

• How to distribute the workload among work centers.

• What job processing sequence to use.