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Expand Your Critical Thinking 20-02 a2, b-c (Essay) MiniTek manufactures private-label small electronic products, such as alarm clocks, calculators, kitchen timers, stopwatches, and automatic pencil sharpeners. Some of the products are sold as sets, and others are sold individually, Products are studied as to their sales potential, and then cost estimates are made. The Engineering Department develops production plans, and then production begins. The company has generally had very successful product introductions. Only two products introduced by the company have been discontinued. One of the products currently sold is a multi-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 experienced a great deal of difficulty in making the circuit boards for the clocks. The production process has never operated smoothly. The product is unprofitable at the present time, primarily 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 attempting to revise the manufacturing process, but the revision will take another 6 months at least. The clocks were very popular when they were introduced, and since they are private-label, the company has not suffered much from the recalls. Presently, the company has a very large order for several items from Kmart Stores. The order includes 5,000 of the multi-alarm clocks. When the company suggested that Kmart purchase the clocks from another manufacturer, Kmart threatened to rescind the entire order unless the clocks were included The company has therefore investigated the possibility of having another company make the clocks for them. The clocks were bid for the Kmart order based on an estimated $6.90 cost to manufacture: Circuit board, 1 each @ $2.00 Plastic case, 1 each @ $0.80 Alarms, 4 @ $0.15 each Labor, 15 minutes @ $12/hour Overhead, $2.00 per labor hour $2.00 0.80 0.60 3.00 Dor hour 0.50 MiniTek could purchase clocks to fill the Kmart order for $10 from Trans-Tech Asia, a korean manufacturer with a very good quality record. Trans-Tech has offered to reduce the price to $7.50 after MiniTek has been a customer for 6 months, placing an order of at least 1,000 units per month. If MiniTek becomes a "preferred customer" by purchasing 15,000 units per year, the price would be reduced still further to $4.50. Omega Products, a local manufacturer, has also offered to make clocks for MiniTek. They have offered to sell 5,000 docks for $5 each. However, Omega Products has been in business for only 6 months. They have experienced significant tumover in their labor force, and the local press has reported that the owners may face tax evasion charges soon. The owner of Omega Products is an electronic engineer, however, and the quality of the clocks is likely to be good. If MiniTek decides to purchase the clocks from either Trans-Tech or Omega, all the costs to manufacture could be avoided, except a total of $1,000 in overhead costs for machine depreciation. The machinery is fairly new, and has no alternate use. What is the difference in profit under each of the alternatives if the clocks are to be sold for $14.50 each to Kmart? Profit Make $38,000 Buy-Trans-Tech $21,500 Buy-Omega $46,500 LINK TO TEXT What are the most important nonfinancial factors that MiniTek should consider when making this decision? LINK TO TEXT What do you think MiniTek should do in regard to the Kmart order? What should it do in regard to continuing to manufacture the multi-alarm clocks?

Answer 1

Answer-1:

Make Buy-Trans Tech Buy-Omega 14.50 $ 14.50 $ Sales revenue 14.50 Variable manufacturing costs: Circuit board 2.00 Plastic case 0.80 Alarms (4 @ $0.15 each) 0.60 Labor 3.00 Overhead 0.50 Purchase cost 0.00 10.00 5.00 Fixed manufacturing costs:($1,000/5,000) Total manufacturing cost Profit per unit Total profit (5,000*profit per unit) 0.20 0.20 6.90 10.20 5.20 7.60 $ 38,000.00 $ 4.30 $ 9.30 21,500.00 $ 46,500.00

The company will make the most profit if the clocks are purchased from Omega Company.

Answer-2:

There are several important non-financial factors described in the case. Other factors might be identified as well. The factors described are:

The company is having serious difficulty manufacturing the clocks. Therefore, it would probably be willing to have someone else manu­facture the clocks, even if it cost more to do so. The most promising company appears to be Omega; however, there is a serious question about Omega’s ability to remain in business. However, the company could purchase just this one order from Omega, and then continue to search for another manufacturer, or stop manufacturing the clocks. Trans Tech’s stringent requirements for preferred customer status, in the form of large sales requirements, appear to limit the possibilities for MinTek manufacturer to use it as a supplier. However, if MinTek manufacturer does desire to continue to offer the clocks because of their popularity, then perhaps Trans Tech could be used in the future.

Answer-3:

MinTek manufacturer should use Omega to manufacture the Kmart order. After that, the company should not offer the clocks any longer. Espe­cially since the clocks are no longer very profitable, it does not seem like a good idea to keep spending money to modify the process.