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I. Background. Western Chipsets, Inc. is a medium - sized supplier of sophisticated electronic components ( chipsets ) used in telecom and Internet switching hardware.
I. Background. Western Chipsets, Inc. is a mediumsized supplier of sophisticated electronic components chipsets used in telecom and Internet switching hardware. The firms largest customers are Cisco Systems CSCO Lucent Technologies LUComCorp COMS Nortel Networks NT and Tellabs, Inc. TLAB Western Chipsets primary product is a chipset designed to combine voice and data signals in a highly efficient way and feed the resulting data stream into fiber optic cable networks. While the market for this chipset is highly competitive, Western Chipsets has been able to experience higherthanaverage operating margins primarily because of its sophisticated orderprocessing systems and extremely lean operations; the lag between customer orders and product shipments has been cut to an industryleading days compared to the industry average of days As the result of this low lead time, Western Chipsets has been able to operate without any inventories. Western Chipsets recently completed a move of its manufacturing operations to a new, stateoftheart facility. The facility allows Western Chipsets to produce a maximum of of its chipsets per month. II Results of operations. Western Chipsets Audited Income Statement for Year Ended Dec Revenues $ CGS Gross margin $ G&A incl taxes Net income $ CGS Detail Direct materials actual $ Direct labor actual Overhead Total CGS $ Chipsets manufactured and shipped Average unit cost III. Budgets prepared in December Revenue Budget Estimated production and sales Estimated average selling price $ Budgeted revenues $ CGS Budget Unit direct materials cost estimate $ Unit direct labor cost estimate Unit direct cost estimate $ Estimate production and sales Total direct cost estimate $ Budgeted overhead CGS Budget $ Budgeted IS Revenues $ CGS Gross margin $ G&A incl taxes Net income $ IV Management stock option compensation plan. The management team of Western Chipsets has been historically well compensated. An important component of compensation, designed to retain talent and to force managers to behave as owners, has been a significant stockoption grant to managers. The grant of options has been tied to certain annual firmwide performance targets. These triggers were generally set to be achievable the firm had met them every year through Based on the budgets, the compensation committee of the Western Chipsets board of directors set a stock option compensation plan for managers of the firm. The plan guaranteed substantial grants of inthemoney stock options to all levels of the management team as long as the firms net income for exceeds the $ level. V Preliminary results prepared on December The top management team of Western Chipsets examined the firms operations through the first months of on December The actual results and the estimates for December are below. The December estimates were prepared based on the number of firm orders received by the firm for delivery in the month of December. No further orders were anticipated. The direct materials and direct labor costs were prepared based on the actual average unit DM and DL usage through November $ and $ respectively These were expected to be essentially the same in December. Finally, overhead and G&A amounts for December were prepared using all of the payments scheduled to be made for equipment leases, facility leases, taxes, and other G&A amounts. Western Chipsets could not postpone paying for any of these items. All overhead and G&A costs are fixed they do not go up or down with the number of units, at least not in the short run. Results Through Nov Dec Estimates Total Production and sales Average selling price $ $ $ Revenues $ $ $ Direct materials usage Direct labor usage Direct costs Overhead CGS Results Through Dec Nov Estimates Total Revenues $ $ $ CGS Gross margin $ $ $ G&A incl taxes Net income $ $ $ How many units must be produced and inventoried for Western Chipsets to exactly meet the $ option trigger?
I. Background.
Western Chipsets, Inc. is a mediumsized supplier of sophisticated electronic components chipsets used in telecom and Internet switching hardware. The firms largest customers are Cisco Systems CSCO Lucent Technologies LUComCorp COMS Nortel Networks NT and Tellabs, Inc. TLAB
Western Chipsets primary product is a chipset designed to combine voice and data signals in a highly efficient way and feed the resulting data stream into fiber optic cable networks.
While the market for this chipset is highly competitive, Western Chipsets has been able to experience higherthanaverage operating margins primarily because of its sophisticated orderprocessing systems and extremely lean operations; the lag between customer orders and product shipments has been cut to an industryleading days compared to the industry average of days As the result of this low lead time, Western Chipsets has been able to operate without any inventories.
Western Chipsets recently completed a move of its manufacturing operations to a new, stateoftheart facility. The facility allows Western Chipsets to produce a maximum of of its chipsets per month.
II Results of operations.
Western Chipsets
Audited Income Statement for Year Ended Dec
Revenues $
CGS
Gross margin $
G&A incl taxes
Net income $
CGS Detail
Direct materials actual $
Direct labor actual
Overhead
Total CGS $
Chipsets manufactured and shipped
Average unit cost
III. Budgets prepared in December
Revenue Budget
Estimated production and sales
Estimated average selling price $
Budgeted revenues $
CGS Budget
Unit direct materials cost estimate $
Unit direct labor cost estimate
Unit direct cost estimate $
Estimate production and sales
Total direct cost estimate $
Budgeted overhead
CGS Budget $
Budgeted IS
Revenues $
CGS
Gross margin $
G&A incl taxes
Net income $
IV Management stock option compensation plan.
The management team of Western Chipsets has been historically well compensated. An important component of compensation, designed to retain talent and to force managers to behave as owners, has been a significant stockoption grant to managers. The grant of options has been tied to certain annual firmwide performance targets. These triggers were generally set to be achievable the firm had met them every year through
Based on the budgets, the compensation committee of the Western Chipsets board of directors set a stock option compensation plan for managers of the firm. The plan guaranteed substantial grants of inthemoney stock options to all levels of the management team as long as the firms net income for exceeds the $ level.
V Preliminary results prepared on December
The top management team of Western Chipsets examined the firms operations through the first months of on December The actual results and the estimates for December are below.
The December estimates were prepared based on the number of firm orders received by the firm for delivery in the month of December. No further orders were anticipated.
The direct materials and direct labor costs were prepared based on the actual average unit DM and DL usage through November $ and $ respectively These were expected to be essentially the same in December.
Finally, overhead and G&A amounts for December were prepared using all of the payments scheduled to be made for equipment leases, facility leases, taxes, and other G&A amounts. Western Chipsets could not postpone paying for any of these items. All overhead and G&A costs are fixed they do not go up or down with the number of units, at least not in the short run.
Results
Through Nov Dec Estimates
Total
Production and sales
Average selling price $ $ $
Revenues $ $ $
Direct materials usage
Direct labor usage
Direct costs
Overhead
CGS
Results
Through Dec
Nov Estimates Total
Revenues $ $ $
CGS
Gross margin $ $ $
G&A incl taxes
Net income $ $ $
How many units must be produced and inventoried for Western Chipsets to exactly meet the $ option trigger?
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