Homer Industries, a Springfield, OR company, plans to introduce its new line of Digital Watches. The company has invested US$4 million in R&D 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 2019 before a full market release is done worldwide in 2020. Homer Industries has not reached a decision about where to manufacture the product; however, the test market is set for Christmas 2019 in particular European cities (part A) and also for some guidance on how to compete in the rest of the European Union region in 2020 (part B).

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 MXN5,225.00 per manufactured unit plus an initial set-up cost of MXN1,425,000. 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$34 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 19, assume no changes in the exchange rate throughout the entire 2019 and 2020)

B) Dublin, Ireland. The McClausky PLC can manufacture up to 75,000 units per year. The company charges 270 per manufactured unit plus an initial set-up cost of 70,400. 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 18 per unit in shipping, packaging, and handling to have the product ready for distribution throughout the major Western European city stores by Nov 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.

Managerial situations

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 450 (before Value Added Taxes).

Nilhaus will charge a 20% sales commission from the retail price to account for receiving and delivering the products to all the stores, and selling the watch to all the interested parties.

In addition, Homer will pay 900,000 for its share in an advertising campaign. Also, the agreement between Homer and Nilhaus implies the following:

• Homer needs to deliver 40,000 units by Oct 22 so Nilhaus can stock its stores in Paris, Amsterdam, and Madrid before the Holiday season starts.
• Homer needs to deliver a second shipment of 60,000 by Nov 28 to stock the other stores across the Euro zone

Q1. Please tell me how will Homer design its manufacturing orders to meet Nilhaus contract of 100,000 units? (hint: check US$ cost per unit in each location to arrive at better conclusions because you have 2 options on the Nov 28 order)

Q2. Given the information provided above, and your answer to Q1 what are the total costs in US$s (manufacturing, administrative, advertising, delivery, etc.) for the 100,000 units that Homer expects to sell in the Western Europe for 2019?

Q3. Please estimate the total US$ revenues that Homer will achieve by selling the 100,000 units to Nilhaus

Q4. Does Homer be able to make a profit with this product after its test market? In other words, what will be the total profit or loss- of this project?

Q5. What is the break even point for this operation? (Or, how many units does Homer need to sell to compensate all the fixed costs regardless of R&D expenditures)