PROBLEM 4: Cost Volume Profit In the Face of Uncertainty A niche server manufacturer (the Company) is exploring changing its manufacturing practice. Its current product, DX38 is priced at $100. If demand picks up, it can raise prices, but competition may cap its ability of how much. Sales are expected to be 150,000 units for next year. Currently, the Company leases plant from HP using some of their equipment. The Company manufactures about 70% of the parts of this circuit board. It is considering a significant reengineering project to change the plant and manufacturing process. The project's objective is to increase the number of purchased parts (to about 55%) and reduce complexity of the process. This would enable the company to remove some leased equipment and to sell some of the most expensive equipment in the Plant. The per-unit manufacturing costs for 150,000 units for DX38 are as follows: Current Manufacturing Costs Proposed Manufacturing Costs Materials & purchased parts $6.00 $15.00 Direct Labor $12.50 $13.75 Variable Overhead $25.00 $30.00 Fixed Overhead $40.00 $20.00 Info. On DX38 Setups Batch size 3,000 50 2,300 50 Cost per Setup $300 55,000 Machine Hours $300 88,000 There are $10/unit commission costs and $1.25 million fixed costs for SG&A. These costs will remain under both circumstances. Your client has asked you for the following: i. Contribution margin per unit current vs. proposed? ii. At what level of unit sales would the Company be indifferent to the alternatives. iii. What is the Company's strategy & what does your team recommend it should be? (Support w/any external research on server pricing and demand) iv. Should the Company undertake the reengineering? Support your answer using sensitivity analysis. [2.0 page limit]