Technology Plus manufactures small private-label electronic products, such as alarm clocks, stopwatches, kitchen timers, calculators, and automatic pencil sharpeners. It sells some of the products as sets and others individually. The company studies the products for their sales potential, and then makes cost estimates. The engineering department develops production plans, and then production begins. The company has generally had very successful product introduction. It has discontinued only two products it has introduced.
One of the products it currently sells is a multi-alarm alarm clock. The clock has four alarms that can be programmed to sound at various times and for varying lengths of time. The company has had a lot of trouble making the circuit boards for the clocks. The production process has never operated smoothly. The product is currently unprofitable, mainly because of warranty repairs and product recalls. Two models of the clocks were recalled, for example, because they sometimes caused an electric shock when the alarms were being shut off. The engineering department is trying to revise the manufacturing process, but the revision will take another six months at least.
The clocks were very popular when they were introduced, and since they are a private label, the company has not suffered much from the recalls. Presently, the company has a very large order for several items from a major retailer with locations across Canada. The order includes 5,000 of the multi-alarm clocks. When the company suggested that the retailer purchase the clocks from another manufacturer, the retailer threatened to cancel the entire order unless the clocks were included.
The company has therefore investigated the possibility of having another company make the clocks for it. Its bid for the retailer's order was based on an estimated $6.90 cost to manufacture the clocks, broken down as follows:
Circuit board, 1 each @ $2.00...............................$2.00
Plastic case, 1 each @ $0.80...................................0.80
Alarms, 4 @ $0.15 each........................................0.60
Labour, 15 minutes @ $12/hour...............................3.00
Overhead, $2.00 per labour hour..............................0.50
Technology Plus could purchase clocks to fill the retailer's order for $10 from Silver Star, a Korean manufacturer with a very good quality re- cord. Silver Star has offered to reduce the price to $7.50 after Technology Plus has been a customer for six months and agrees to order at least 1,000 units per month. If Technology Plus becomes a "preferred customer" by purchasing 15,000 units per year, Silver Star would reduce the price still further to $4.50.
Alpha Products, a local manufacturer, has also offered to make clocks for Technology Plus. It has offered to sell 5,000 clocks for $5 each. However, Alpha Products has been in business for only six months. It has had significant turnover in its labour force, and the local press has reported that the owners may face tax evasion charges soon. The owner of Alpha Products is an electronics engineer, however, and the quality of the clocks is likely to be good.
If Technology Plus decides to purchase the clocks from either Silver Star or Alpha, all of its current costs to manufacture the alarm clock could be avoided, except a total of $5,000 in overhead costs for machine depreciation. The machinery is fairly new and has no alternative use.
Instructions
Answer the following questions:
(a) What is the difference in profit under each of the alternatives if the clocks are to be sold for $14.50 each to the retailer?
(b) What are the most important non-financial factors that Technology Plus should consider when making this decision?
(c) What do you think Technology Plus should do about the retailer's order? What should it do with regard to continuing to manufacture the multi-alarm alarm clocks? Be prepared to defend your answer.