Question: How many units must be produced and inventoried for Western Chipsets to exactly meet the $100,000,000 option trigger?

Supporting Information:

Western Chipsets, Inc. is a medium-sized supplier of sophisticated electronic components (chipsets) used in telecom and Internet switching hardware. The firm's largest customers are Cisco Systems (CSCO), Lucent Technologies (LU), 3ComCorp (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 higher-than-average operating margins primarily because of its sophisticated order-processing systems and extremely lean operations; the lag between customer orders and product shipments has been cut to an industry-leading 30 days (compared to the industry average of 65 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, state-of-the-art facility. The facility allows Western Chipsets to produce a maximum of 1,000,000 of its chipsets per month.Results of 2002 operations. Western Chipsets Audited Income Statement for Year Ended Dec-31-2002 Revenues $ 271 ,000,000 068 143,000,000 Gross margin $ 128,000,000 G&A (incl. taxes) 23,000,000 Net income $ 105,000,000 2002 065 Detail Direct materials - actual $ 32,000,000 Direct labor - actual 9,000,000 Overhead 102,000,000 Total 068 $ 143,000,000 Chipsets manufactured and shipped 7,000,000 Average unit cost 20.43 2003 Budgets prepared in December 2002. 2003 Revenue Budget Estimated 2003 production and sales 7,700,000 Estimated 2003 average selling price $ 36.30 Budgeted revenues $ 279,510,000 2003 665 Budget Unit direct materials cost estimate 13 4.50 Unit direct labor cost estimate 1.30 Unit direct cost estimate 15 5.80 Estimate 2003 production and sales 7,700,000 Total direct cost estimate 15 44,660,000 Budgeted 2003 overhead 110,000,000 2003 CBS Budget 15 154,660,000 2003 Budgeted IIS Revenues $ 279,510,000 068 1 54,660,000 Gross margin 13 124,650,000 G&A (incl. taxes) 24,000,000 Net income 15 100,850,000 The top management team of Western Chipsets examined the rm's operations through the rst 11 months of 2003 on December 3. The actual results and the estimates for December 2003 are below. The December estimates were prepared based on the number of rm orders received by the rm 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 ($4.47 and $1.21, 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 xed they do not go up or down with the number of units, at least not in the short run. 2003 Results Th rough Dec-03 Nov-03 Estimates Total Production and sales 7,290,000 312,000 7,602,000 Average selling price $ 36.00 $ 36.00 $ 36.00 Revenues $ 262,440,000 $ 1 1 ,232,000 $ 273,672,000 Direct materials usage 32,566,300 1,394,640 33,980,940 Direct labor usage 8,820,900 377,520 9,1 98,420 Direct costs 41,407,200 1 ,772,160 43,1 79,360 Overhead 90,000,000 19,000,000 109,000,000 068 1 31,407,200 20,772,160 152,1 79,360 2003 Results Th rough Dec-03 Nov-03 Estimates Total Revenues $ 262,440,000 $ 1 1 ,232,000 $ 273,672,000 (:65 1 31,407,200 20,772,160 152,1 79,360 Gross margin $ 131,032,600 $ (9,540,160) $ 121 ,492,640 G&A (incl. taxes) 1 9,000,000 4,300,000 23,300,000 Net income $ 112,032,600 $ (13,840,160) $ 98,192,640