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Technology Plus manufactures private - label small electronic products, such as alarm clocks, calculators, kitchen timers, stopwatches, and automatic pencil sharpeners. Some of the products
Technology Plus manufactures privatelabel small electronic products, such as alarm clocks, calculators, kitchen timers, stopwatches, and automatic pencil sharpeners. Some of the products are sold as sets, and others are sold individually. Products are
studied as to their sales potential, and then cost estimates are made. The Engineering Department develops production plans, and then production begins. The company has generally had very successful product introductions. Only two products introduced by the company have been discontinued.
One of the products currently sold is a multialarm alarm clock. The clock has four alarms that can be programmed to sound at various times and for varying lengths of time. The company has experienced a great deal of difficulty in making the circuit boards for the clocks. The production process has never operated smoothly. The product is unprofitable at the present time, primarily because of warranty repairs and product recalls. Two models of the clocks were recalled, for example, because they sometimes caused an electric shock when the alarms were being shut off. The Engineering Department is attempting to revise the manufacturing process, but the revision will take another months at least.
The clocks were very popular when they were introduced, and since they are private label, the company has not suffered much from the recalls. Presently, the company has a very large order for several items from Kmart Stores. The order includes of the multialarm clocks. When the company suggested that Kmart purchase the clocks from another manufacturer, Kmart threatened to rescind the entire order unless the clocks were included.
The company has therefore investigated the possibility of having another company make the clocks for them. The clocks were bid for the Kmart order based on an estimated $ cost to manufacture:
Circuit board, each @ $ $
Plastic case, each @ $
Alarms, @ $ each
Labor, minutes @ $hour
Overhead, $ per labor hour
Technology Plus could purchase clocks to fill the Kmart order for $ from Silver Star, a Korean manufacturer with a very good quality record. Silver Star has offered to reduce the price to $ after Technology Plus has been a customer for months, plac ing an order of at least units per month. If Technology Plus becomes a preferred customer by purchasing units per year, the price would be reduced still further to $
Alpha Products, a local manufacturer, has also offered to make clocks for Technology Plus. They have offered to sell clocks for $ each. However, Alpha Products has been in business for only months. They have experienced significant turnover in their labor force, and the local press has reported that the owners may face tax evasion charges soon. The owner of Alpha Products is an electronic engineer, however, and the quality of the clocks is likely to be good.
If Technology Plus decides to purchase the clocks from either Silver Star or Alpha, all the costs to manufacture could be avoided, except a total of $ in overhead costs for machine depreciation. The machinery is fairly new, and has no alternate use.
Instructions
What is the difference in profit under each of the alternatives if the clocks are to be sold for $ each to Kmart?
What are the most important nonfinancial factors that Technology Plus should consider when making this decision?
What do you think Technology Plus should do in regard to the Kmart order? What should it do in regard to continuing to manufacture the multialarm alarm clocks? Be prepared to defend your answer.
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