Sunstar sells a full line of small home kitchen appliances, including toasters, coffee makers, blenders, and bread machines. It is organized into a marketing division and a manufacturing division. The manufacturing division is composed of several plants, each a cost center, making one type of appliance. The toaster plant makes different models of toasters and toaster ovens. Most of the parts, such as the heating elements and racks for each toaster, are purchased externally, but a few are manufactured in the plant, including the sheet metal forming the body of the toaster. The toaster plant has a number of departments including sheet metal fabrication, purchasing, assembly, quality assurance, packaging, and shipping.

Each toaster model has a product manager who is responsible for manufacturing the product. Each product manager manages several similar models. Product managers, with the help of purchasing, negotiate prices and delivery schedules with external part vendors. Sunstar’s corporate headquarters sets all the toaster models’ selling prices and quarterly production quotas to maximize profits. Product managers’ compensation and promotions are based on lowering unit costs and meeting corporate headquarters’ production quota.

The product manager sets production schedule quotas for the product and is responsible for ensuring that the distribution division of Sunstar has the appropriate number of toasters at each distribution center. Product managers have discretion over outsourcing, production methods, and labor scheduling to manufacture the particular models under their control. For example, they do not have to produce the exact number of toasters set by corporate headquarters quarterly, but rather product managers have some discretion to produce more or fewer toasters as long as the distribution centers have enough inventory to meet demand.

The following data were collected for one particular toaster oven, model CVP- 6907. These data are corporate forecasts for model CVP- 6907 in regard to how prices and total manufacturing costs are expected to vary with the number of toasters manufactured (and sold) per day.

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In addition to the manufacturing costs reported in the table, there are $ 10 of variable selling and distribution costs per toaster.

Required:

a. What daily production quantity would you expect the product manager for model CVP- 6907 to set? Why?

b. Evaluate Sunstar’s performance evaluation system as it pertains to product managers. What behavior does it likely create among manufacturing product managers?

c. Describe the changes you would recommend Sunstar consider making in its performance evaluation system for manufacturing product managers.

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MODEL CVP-6907 Total Cost and Price by Quantity Quantity Manufacturing Cost Price 100 105 110 115 120 125 130 135 140 $1,450 1,496 1,545 1,596 1,650 1,706 1,765 1,826 1,890 1,956 2,025 $120 116 112 108 104 100 96 92 88 145 150 84 80