Yolanda is a Canadian company that specializes in automotive parts. Due to the recent recession, the business has not been doing well. Thomas Sullivan, who has been a long-term friend of the owner of Yolanda, has decided to inject some cash into the business and buy out 51% of the shares.He sees the potential in Yolanda and would like to take the company public once their business has turned around. In order to maintain the relationship with the bank, Tom has to make sure that the business can generate enough cash flow and profit going forward.

Yolanda currently manufactures and sells three different products - YO, LAN and DA. Yolanda has always been involved in the low end of the markets selling LAN and DA.. Through its extensive cost reduction initiatives, these products have finally turned into profitability. In order to round off its product offering, management has decided to move into the high end of the market selling YO a year ago. A market study has indicated that consumers are moving more and more to the high end products and there are lots of growth opportunities for them.

Projected income statements by product line for the next fiscal year are:

YO

LAN

DA

TOTAL

Unit sales

10,000

500,000

125,000

635,000

Revenue

$ 925,000

$ 1,000,000

$ 575,000

$ 2,500,000

Variable manufacturing cost

(285,000)

(350,000)

(150,000)

(785,000)

Fixed manufacturing cost

(304,200)

(289,000)

(166,800)

(760,000)

Gross Margin

$ 335,800

$ 361,000

$ 258,200

$ 955,000

Variable general & administrative expense

(270,000)

(200,000)

(80,000)

(550,000)

Fixed general & administrative expense

(125,800)

(136,000)

(78,200)

(340,000)

Net income (loss) before tax

$ (60,000)

$ 25,000

$ 100,000

$ 65,000

Total production capacity is 687,500 units. The fixed general and administrative expenses are allocated to products in proportion to revenues. The fixed manufacturing costs are allocated to products by various allocation bases, such as square meters for factory rent, machine hours for repairs, and so forth.

In respect of YO, it is believed that every 20% decline in price will increase the sales volume by 10,000 units. For every 10,000 unit increase in volume, fixed manufacturing costs will increase by $200,000.

Yolanda management is concerned about the loss for YO as they would have hoped that the introduction of YO can bring their profit up to at least 15% of sales. Various alternative courses of corrective action are under consideration:

Alternative A:

The company would purchase some new machinery for the production of YO. This new machinery would involve an immediate cash outlay of $650,000. Management expects that the new machinery would reduce variable production costs so that total variable costs and expenses (manufacturing and general and administrative) for YO would be 52 percent of YO revenues. The new machinery would increase total fixed costs and expenses (manufacturing and general and administrative) allocated to YO to $ 480,000 per year. There would be no additional fixed costs and expenses allocated to products LAN and DA.

Alternative B:

The company would discontinue the manufacture of product YO. Selling prices of products LAN and DA would remain constant. Management expects that product DA production and revenues would increase by 50 percent. Some of the present machinery devoted to product YO could be sold at scrap value, which equals its removal costs. The removal of this machinery would reduce all fixed costs and expenses allocated to YO by $ 30,000 per year. The space previously used for YO can be rented to an outside organization for $ 157,500 per year.

Alternative C:

The company would outsource all of its YO requirements from a Chinese manufacturer at $20 per unit (freight & duties included).

Required:

In good case format write report to recommend a course of action for Yolanda. The report should include the following:

A brief situational analysis to review the key stakeholders and their objectives, the goal and company strategies, key success factors and competitive advantage;

A qualitative and quantitative analysis of each of the three alternatives.