Midterm Exam Mba 438 2013 Answer
Question B3: 10 Marks
Your marketing department has indicated that a certain type of stationery card can be sold for $3 per unit. In addition, they have indicated that they feel that at a price of $3 per card they will be able to sell 1000 units over the next three years.
The managers in operations have found two ways to manufacture the stationery cards. Option1 would require a machine that cost $200 and the labor, materials, and other resources required to produce a card would cost the organization and additional $2 per card. Option 2, on the other hand, would require a machine that cost $500 and the labor, materials, and other resources required to produce a card would only cost the organization $1 per card.
A purchasing manager, while investigating material costs for producing the cards, realized that purchasing the stationery cards from a contract manufacturer would cost the organization $1.75 per card. This is option 3.
What should this organization do? Buy the cards from a contract manufacturer, make the cards using method number one, or make the cards using method number two? What is the cheapest option and how much profit will they make? Support your answer with calculations and/or a graph.
Answer
Break Even Analysis
Option #1 Cost Formula - COST = $200 + $2Q = $200 + ($2/unit * 1000units) = $2200
Option #2 Cost Formula - COST = $500 + $1Q = $500 + ($1/unit * 1000units) = $1500
According to this calculation, the organization should utilize method #2 because the total cost $700 cheaper than method #1. Make vs. Buy Decision
Option #3: Cost of buying the cards from the contract manufacturer-
COST = $1.75Q = ($1.75/unit * 1000units) = $1750
According to this calculation, we see that option #2 is still the best choice.
Profit Calculation Using Method #2
If we decide to utilize method #2 and we assume that marketing’s calculations are correct, we can then calculate the expected profit from this venture.
Your marketing department has indicated that a certain type of stationery card can be sold for $3 per unit. In addition, they have indicated that they feel that at a price of $3 per card they will be able to sell 1000 units over the next three years.
The managers in operations have found two ways to manufacture the stationery cards. Option1 would require a machine that cost $200 and the labor, materials, and other resources required to produce a card would cost the organization and additional $2 per card. Option 2, on the other hand, would require a machine that cost $500 and the labor, materials, and other resources required to produce a card would only cost the organization $1 per card.
A purchasing manager, while investigating material costs for producing the cards, realized that purchasing the stationery cards from a contract manufacturer would cost the organization $1.75 per card. This is option 3.
What should this organization do? Buy the cards from a contract manufacturer, make the cards using method number one, or make the cards using method number two? What is the cheapest option and how much profit will they make? Support your answer with calculations and/or a graph.
Answer
Break Even Analysis
Option #1 Cost Formula - COST = $200 + $2Q = $200 + ($2/unit * 1000units) = $2200
Option #2 Cost Formula - COST = $500 + $1Q = $500 + ($1/unit * 1000units) = $1500
According to this calculation, the organization should utilize method #2 because the total cost $700 cheaper than method #1. Make vs. Buy Decision
Option #3: Cost of buying the cards from the contract manufacturer-
COST = $1.75Q = ($1.75/unit * 1000units) = $1750
According to this calculation, we see that option #2 is still the best choice.
Profit Calculation Using Method #2
If we decide to utilize method #2 and we assume that marketing’s calculations are correct, we can then calculate the expected profit from this venture.