Kingbird Plus manufactures small private-label electronic products, such as alarm clocks, stopwatches, kitchen timers, calculators, and automatic pencil sharpeners. It sells some of the products as sets and others individually. The company studies the products for their sales potential and then makes cost estimates. The engineering department develops production plans, and then production begins. The company has generally had very successful product introduction. It has discontinued only two products it has introduced.

One of the products it currently sells is a multi-alarm 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 had a lot of trouble making the circuit boards for the clocks. The production process has never operated smoothly. The product is currently unprofitable, mainly 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 trying to revise the manufacturing process, but the revision will take another six months at least.

The clocks were very popular when they were introduced, and since they are a private label, the company has not suffered much from the recalls. Presently, the company has a very large order for several items from a major retailer with locations across Canada. The order includes 4,000 of the multi-alarm clocks. When the company suggested that the retailer purchase the clocks from another manufacturer, the retailer threatened to cancel the entire order unless the clocks were included.

The company has therefore investigated the possibility of having another company make the clocks for it. Its bid for the retailers order was based on an estimated $6.94 cost to manufacture the clocks, broken down as follows:

Circuit board, 1 each @ $2.40		$2.40
Plastic case, 1 each @ $0.60		0.60
Alarms, 4 @ $0.11 each		0.44
Labour, 15 minutes @ $12/hour		3.00
Overhead, $2.00 per labour hour		0.50

Kingbird Plus could purchase clocks to fill the retailers order for $10.00 from Ivanhoe Star, a Korean manufacturer with a very good quality record. Ivanhoe Star has offered to reduce the price to $8.00 after Kingbird Plus has been a customer for six months and agrees to order at least 1,000 units per month. If Kingbird Plus becomes a preferred customer by purchasing 16,000 units per year, Ivanhoe Star would reduce the price still further to $4.50.

Accustart Products, a local manufacturer, has also offered to make clocks for Kingbird Plus. It has offered to sell 4,000 clocks for $5.00 each. However, Accustart Products has been in business for only six months. It has had significant employee turnover, and the local press has reported that the owners may face tax evasion charges soon. The owner of Accustart Products is an electronics engineer, however, and the quality of the clocks is likely to be good.

If Kingbird Plus decides to purchase the clocks from either Ivanhoe Star or Accustart, all of its current costs to manufacture the alarm clock could be avoided, except a total of $4,000 in overhead costs for machine depreciation. The machinery is fairly new and has no alternative use.

(a)

Calculate the profit under each of the alternatives if the clocks are to be sold for $15.00 each to the retailer.

		Profit
If Kingbird Plus makes electronic products		$enter a dollar amount
If Kingbird Plus buys from Ivanhoe Star		$enter a dollar amount
If Kingbird Plus buys from Accustart Products		$enter a dollar amount

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