Munzad Clock Company (A)

As Adam Munzad, president of the Munzad Clock Company, stared at the numbers compiled by his controller, Tom Moody, and his sales manager Ross Taylor, the look on his face was one of confusion. "The more I look at this the more it looks like we really don't know how much this new household timer is going to cost. We need to get a better handle on the costs of this thing or we will never abe able to decide how to price it."

The Company

Munzad Clock Company was started by Adam Munzad, the company's president, in 1995. In 2008, Munzad had sold out to Meghna Appliance Corporation, but he remained with the company as Munzad Clock's president. Originally, Munzad Clock made decorative electric clocks, but by 2002 Adam had decided he was much better at making the works than the decorations. So the company shifted to making accurate, durable, but inexpensive electric timing mechanisms. The company now made only three basic models, differing in size and strength. Slight modifications were made to fit each customer's needs. Sales had grown to over $50 million, and timing mechanisms were made to fit each customer's needs. Sales had grown to over $50 million, and the timing mechanisms were made entirely for producers of timed electrical appliances. About half of Munzad's output went to Meghna appliance and about half to other companies.

The new household timing device

It all started because sometime over the 2010 Labor Day weekend, Adam Munzad's house was burgled while he and his family were enjoying the last days of their summer vacation. Thereafter, though he knew he was closing the proverbial barn door after the cow had gone, Adam did a number of things to try to prevent a repetition. Besides improving locks, he bought two timers that could be set to run on house lights in the evening.

That is what gave him the idea to make a better timing mechanism for household use, one that head two features that he thought made his timer superior to those currently on the market. The Munzad timer had two options: a 48-hour cycle (so that lights would not turn on and off at the same time each day), or two different 24-hour cycles, so that one timer could operate two lights, each on a different 24-hour cycle. The design of these features was quite simple. There were two different 24-hour cycles, and for the 48-hour option, the timer switched back and forth.

Adam's sales manager, Ross Taylor, was not sure how or valuable these options would be to the potential customer. Furthermore, this complete product would have to be sold through wholesalers and manufacturers' representatives, which were new to Munzad Clock. Price, he thought, would be an important factor since other timers were on the market.

Pricing the new household timing device

Adam asked his controller, Tom Moody, to put some cost figures together. Tom presented the table show in Exhibit 1. The basic timing mechanism, Model A2B, was Munzad's highest volume product, which showed a cost of $3.54. To make the timer that Adam had designed would cost about $9.28. No more machining would be required, but a little fabrication work and a number of wiring and assembly operations would be necessary.

Tom had checked on available capacity before computing his costs. As it happened, adequate space for the timer' s assembly had just become available because the company had shifted from having one warehouse for finished goods at the plant, to tow warehouses, one in Pennsylvania and the other in Texas. Making the warehouse into an assembly area would require some tables, lighting, and small tools but no major capital expenditure. About $20,000 ought to cover it, Tom thought.

Adam asked Tom to show his figures to Ross. On the seeing the $9.28 production cost, Ross did the following rough calculation using normal mark-ups to see what this cost might indicate for a retail selling price.

Exhibit 1 Basic Mechanism Purchased Direct Labor Exped. Overhead at Total A2B Parts Supplies 300% of DL Purchased parts 1.11 Fabrication 0.29 0.02 Machining 0.12 0.02 Assembly 0.18 0.03 Total A2B 1.11 0.59 0.07 1.77 3.54 Addition to make new timer Purchased parts 0.24 Fabrication 0.03 0 Machining Assembly 1.32 0.1 Total additions 0.24 1.35 0.1 4.05 5.74 Total New Timer 1.35 1.94 0.17 5.82 9.28Exhibit 2 Overhead item \"H:- of Direct Labor Rosa's Estimate of Variable Amount Supplementary compensation for direct labor 35% (Social Security, holidays. insurance etc.) Supervision (including supplemental 15% compensation) Indirect labor (including supplemental 313% compensation) Machine maintenance 0% Machine depreciation 0% Manufacturing engineering 0% Plant administration (including supplemental 0% compensation) Electricity '34: Occupancy cost 0% Total as percent of direct labor 82% [\\J $9.28 Total manufacturing cost Selling, General and Administration (15% of 1.39 cost) 10.67 Total Costs 1.07 Profit (10% of cost) 11.74 Factory Price Wholesale, Retain and Distribution (50% of 11.74 Selling Price) $23.48 Estimated Retail Selling Price$9.28 Total manufacturing cost 4.25 Fixed manufacturing costs 5.03 Variable costs for the new timer 0.76 Selling, General and Administration (15% of cost) 5.79 0.58 Profit (10% of cost) 6.37 Factory price 6.37 Wholesale, Retail and Distribution (50% of Selling Price) $12.74 Estimated retail selling price