Background:

Garland Chocolate, is a manufacturer company, located in Durham, North Carolina with headquarters in the UK. Garland Chocolate is a leading global manufacturer with a wide range of chocolate and confectionery products with more than 65 brands. Garland Chocolate operates more than 50 plants globally with eight plants in the USA. The Durham plant has 20 products which are spread out to store chains, boutique, and convenience stores in the USA. The Garland Chocolate factory is in need of repair, maintenance and Shanti Suppiah director of operations at Garland Chocolate at Durham is investigating new ideas to improve this situation.

Analysis

Quantitative:

Selling Priceof Garland Chocolates

$145.00

oRaw Materials

$24.65

oPacking Materials

$29.00

oLabor-Manufacturing

$13.05

oLabor-Packing

$7.25

oOverhead & Depreciation

$21.75

oTotal Cost

$95.70

oMargin Profit

$49.30

Outsourcing to Martin Contract Manufacturing costs $35,000.00 in tooling.

Maintenance cost over 12 months is $18,000.00.

The cost of replacing the two packing lines for Edgeworth toffee is $140,000.00.

The cost of replacing the 20-year-old manufacturing line is $600,000.00.

Outsourcing Production Cost

$68.00 (manufacturing and packaging only) Martin quoted

oRaw Materialsprovided by Garland Chocolates

$24.65

oPacking Materials provided by Garland Chocolates

$29.00

oLabor-Packingprovided by Garland Chocolates

$7.25

oOverhead & Depreciation

$21.75

Total cost for outsourcing $150. 95

Qualitative:

Quality of the product has not changed, only the venue of production has.

Garland Chocolate well-reputed brand.

Garland Chocolate is globally well known.

Issues:

Garland Chocolates is not manufacturing and packing their brand of Edgeworth Toffee as efficiently or effectively as possible.

48% Packing efficiency, when the goal is 80%.

Scrap rate is 9.6% when the goal is 1.2%.

Maintenance cost is expected to rise 25% over 12 months, and it is already $18,000.00.

The cost of replacing the two packing lines for Edgeworth toffee is $140,000.00. However, it is expected to achieve the BPO efficiency and scrap rate targets.

The cost of replacing the 20-year-old manufacturing line is $600,000.00, though it was close to the target efficiency of 80% but is showing signs of deterioration.

Marketing has proposed a new marketing strategy (new packaging format) which would deliver an estimated 20% increase in sales.

Outsourcing the packing lines would cost $35,000.00 up front, but the actual cost of production will decrease from $95.70 per case to $68.00

Alternatives:

Alternative 1:

Replace manufacturing lines -Advantages and disadvantages

The advantage of replacing the manufacturing lines now would combat the decreasing efficiency rate, where the disadvantage is that efficiency will increase and in the next years.

Alternative 2:

Accept the offer to outsource the product; this would increase efficiency. However, the quality of the product may be at risk.

Alternative 3:

Don't do anything about it. Save money on new manufacturing which is $600,000.00, two packing lines for Edgeworth toffee is $140,000.00, and save as well $35,000 for outsourcing.

There were two dedicated packing lines for Edgeworth Toffee, one for each format. However, the packing lines had long outlived their useful lives, and efficiencies had declined in recent years (see Exhibit 1). Furthermore, sales of Edgeworth Toffee had been flat for the past couple of years, and in an effort to spur consumer interest in the brand, marketing was proposing a new marketing strategy that included a facelift for the packaging. However, the new packaging would require a different type of packing technology. John Slaughter, the representative from marketing n the Edgeworth Toffee team, felt that the introduction of new packaging combined with a neww marketing campaign could deliver as much as a 20 percent increase in sales. It was unclear to Shanti whether the new marketing strategy would be enough to stimulate increased sales, or if the product was mature and a decline in demand was inevitable

EXHIBIT 1 Operating Standard Costs for Edgeworth Toffee $ per case % $145.00 Selling price 100 Raw material 24.65 17 Packaging material 29.00 20 Labor-manufacturing 13.05 9 Labor-packing 7.25 5 Overhead &depreciation 21.75 15 Total cost 95.70 66 Margin 49.30 34 Page 133 THE MANUFACTURING AND PACKING LINE REPLACEMENT OPTIONS The accounting department set standard costs for each product line annually. Exhibit 1 provides the standard costs for Edgeworth Toffee and Exhibit 2 shows actual operating performance data for the manufacturing and packing lines. As shown in Exhibit 2, the packing line was operating at 48 percent efficiency, and the scrap rate was nearly 10 percent. Annual maintenance costs on the packing line were approximately $18,000 per year and expected to increase by at least 25 percent in the next 12 months

EXHIBIT 2 Manufacturing and Packing Line Performance Statistics Standard Actual Measure (%) (%) Manufacturing efficiency 80 76 Manufacturing serap rate 1.2 1.5 Packing efficiency 80 48 Packing scrap rate 1.2 9.6 Working with Ian Haase, purchasing manager at the Durham plant and a member of the Edgeworth Toffee team, Shanti obtained an estimate of $140,000 for the cost of replacing the two packing lines for Edgeworth Toffee, including installation. It was expected that the new equipment would be able to achieve the BPO efficiency and scrap rate targets and be able to accommodate the new packaging that marketing was recommending Shanti also felt that it was time to examine replacement of the manufacturing line. The manufacturing and packing lines had originally been installed together more than 20 years earlier. Although efficiency of the manufacturing line was close to the target of 80 percent, it was also showing signs of deterioration. The efficiency rate had declined to 76 percent, compared to more than 90 percent five years prior, and it had become increasingly more difficult to find replacement parts. A new manufacturing line would cost approximately $600,000 installed.

Background:

Garland Chocolate, is a manufacturer company, located in Durham, North Carolina with headquarters in the UK. Garland Chocolate is a leading global manufacturer with a wide range of chocolate and confectionery products with more than 65 brands. Garland Chocolate operates more than 50 plants globally with eight plants in the USA. The Durham plant has 20 products which are spread out to store chains, boutique, and convenience stores in the USA. The Garland Chocolate factory is in need of repair, maintenance and Shanti Suppiah director of operations at Garland Chocolate at Durham is investigating new ideas to improve this situation.

Analysis

Quantitative:

Selling Priceof Garland Chocolates

$145.00

oRaw Materials

$24.65

oPacking Materials

$29.00

oLabor-Manufacturing

$13.05

oLabor-Packing

$7.25

oOverhead & Depreciation

$21.75

oTotal Cost

$95.70

oMargin Profit

$49.30

Outsourcing to Martin Contract Manufacturing costs $35,000.00 in tooling.

Maintenance cost over 12 months is $18,000.00.

The cost of replacing the two packing lines for Edgeworth toffee is $140,000.00.

The cost of replacing the 20-year-old manufacturing line is $600,000.00.

Outsourcing Production Cost

$68.00 (manufacturing and packaging only) Martin quoted

oRaw Materialsprovided by Garland Chocolates

$24.65

oPacking Materials provided by Garland Chocolates

$29.00

oLabor-Packingprovided by Garland Chocolates

$7.25

oOverhead & Depreciation

$21.75

Total cost for outsourcing $150. 95

Qualitative:

Quality of the product has not changed, only the venue of production has.

Garland Chocolate well-reputed brand.

Garland Chocolate is globally well known.

Issues:

Garland Chocolates is not manufacturing and packing their brand of Edgeworth Toffee as efficiently or effectively as possible.

48% Packing efficiency, when the goal is 80%.

Scrap rate is 9.6% when the goal is 1.2%.

Maintenance cost is expected to rise 25% over 12 months, and it is already $18,000.00.

The cost of replacing the two packing lines for Edgeworth toffee is $140,000.00. However, it is expected to achieve the BPO efficiency and scrap rate targets.

The cost of replacing the 20-year-old manufacturing line is $600,000.00, though it was close to the target efficiency of 80% but is showing signs of deterioration.

Marketing has proposed a new marketing strategy (new packaging format) which would deliver an estimated 20% increase in sales.

Outsourcing the packing lines would cost $35,000.00 up front, but the actual cost of production will decrease from $95.70 per case to $68.00

Alternatives:

Alternative 1:

Replace manufacturing lines -Advantages and disadvantages

The advantage of replacing the manufacturing lines now would combat the decreasing efficiency rate, where the disadvantage is that efficiency will increase and in the next years.

Alternative 2:

Accept the offer to outsource the product; this would increase efficiency. However, the quality of the product may be at risk.

Alternative 3:

Don't do anything about it. Save money on new manufacturing which is $600,000.00, two packing lines for Edgeworth toffee is $140,000.00, and save as well $35,000 for outsourcing.

Question: 1.How does the analysis change if sales increase or decrease?