Homer and the Introduction of the BartoQ20 Homer Industries, a small family-owned company, plans to introduce its new line of Digital Watches. The company has invested several millions of US$ in Research and Development over the last 3 years to develop its most recent product, The BartoQ20. Mr. Smithers, the company CEO, has asked you for guidance in lieu of the manufacturing options available at this time and the distribution agreement that he signed 2 days ago for conducting a test market in Summer 2020 before a full market release is done worldwide by Christmas 2020. Homer Industries has not reached a decision about where to manufacture the product; however, the test market is set in particular European cities, and also, there is a need for some guidance on how to compete in the rest of the European Union region in 2020. The following information is available. Manufacturing options A) Juarez Mexico. The Beechos SA de CV can manufacture up to 50,000 units per year. Its proposal involves charging MXN 5,130 per manufactured unit plus an initial set-up cost of MXN 990,000. This set-up cost is payable immediately and Homer needs to incur in this cost regardless of the number of units that the plant will produce. Then, Homer needs to pay US$20 per unit for shipping, packaging, and handling to get the product from Juarez to Europe. (Note: MXN refers to Mexican Pesos, the exchange rate between US dollars and Mexican pesos is US$1= MXN 18, assume no changes in the exchange rate throughout the entire 2020) B) Dublin, Ireland. The McClausky PLC can manufacture up to 75,000 units per year. The company charges 252 per manufactured unit plus an initial set-up cost of 90,000. Similar to Beechos, the set-up cost is payable immediately and it is not related to the number of units that the plant produces this year or next year. In addition, Homer needs to pay about 9 per unit in shipping, packaging, and handling to have the product ready for distribution throughout the major Western European city stores by June 27 (no delivery possible before this day because the company has a backlog of orders due to the Brexit uncertainty). The shipping and handling includes ground and freight transportation. There are no other costs. (Note: refers to Euros, the exchange rate between US dollars and Euros is US$1 = 0.90, assume no changes in the exchange rate throughout the entire 2019 and 2020) Notice that costs and delivery dates cannot be changed. Distribution Agreement Homers management team has negotiated an exclusive agreement with Nilhaus PLC to use its stores for launching the product. The company has estimated $2 million to cover for some administrative fixed costs relate to this particular test market A promotion involves selling the BartoQ20 at an introductory retail price of US$ 450 (before Value Added Taxes). Homer will sell each BartoQ20 to Nilhaus at a wholesale price of US$ 360 Nilhaus will be responsible for receiving and delivering the products to all the stores, and selling the watch to all the interested customers. In addition, Homer will pay US$ 1,000,000 for its 50% share in an advertising campaign. Also, the agreement between Homer and Nilhaus implies the following: Homer needs to deliver 40,000 units by June 10 so Nilhaus can stock its stores in Paris, Amsterdam, and Madrid. Homer needs to deliver a second shipment of 60,000 by June 30 to stock the other stores across the Euro zone. Strategic Positioning Given the potential test market, Mr. Smithers is also needing some strategic advice to compete in the European market head to head with the Apple Watch Hermes (https://www.apple.com/apple-watch-hermes/) Although the Hermes version is selling for about $1,400, Homer Industries believes the European Union offers several opportunities such as: Emerging connectivity and affordable Data plans for Mobile Devices Desirability for affordable devices at reasonable prices Increasing demand for American-designed electronics Dissatisfaction with upscale designers However, Mr. Smithers has also recognized the following threats: The increasing nationalism in European consumers The enactment of legislation that can make users to pay for accessing content over the internet The uncertainty that the Brexit and regional instability brings to the market The entry of Chinese and South East Asian competitors in the European market In that manner, Mr. Smithers believes the BartoQ20 can take out a portion of Apple's market share in digital watches, at least in the European Union market. QUESTIONS a) How will Homer design its manufacturing orders to meet Nilhaus contract of 100,000 units? Calculate the cost per unit (in US$) to arrive at better conclusions because you have 2 options on the June 10 order because each plant has a limit of units to produce and Dublin can only provide the June 30 units b) Estimate the potential revenues, variable costs, fixed costs to find the potential profit for this test market c) Know how to find the breakeven point -(or how many units of the BartoQ20 does Homer need to sell to compensate all the fixed costs regardless of R&D expenditures) d) Understand the meaning of Profit Margin, Net Margin, etc. If you do this preliminary work in Excel - my guess is that this will take you about 15 to 20 minutes to solve the entire thing (I did it in about 10 minutes) A) if you do the preliminary work in a correct manner What is the breakeven point for Homer Industries? What is the total manufacturing cost for the 100,000 units? What is the total fixed costs for Homer Industries? What is the projected Profit (Or loss) for Homer Industries? What is the cost of goods sold for Nilhaus? What is the projected Profit (Or loss) for Nilhaus? How many units must be produced by the Mexican plant that minimizes the total manufacturing and shipping costs? How many units must be produced by the Irish plant that minimizes the total manufacturing and shipping costs? Main formulas to use Profit = Sales Variable Cost Fixed Cost Profit = P*Q CV*Q FC Sales = Price * quantity {or P*Q} / Variable cost = Cost * quantity [quantity can be produced or sold] Variable costs types: manufacturing, transportation, shipping, handling, packaging, etc. Fixed costs types: overhead, marketing, manufacturing, transportation, administrative, set up fees, etc. Break even point: Sales = Variable Costs + Fixed Costs P*Q = VC*Q + FC Finding Q Q = FC / (P VC) Net Profit Margin = Profit / Sales or (Sales Costs) / Sales.