Question

Please help: What will be an appropriate scenario/response to use for this task?

Original post: You are a manager at a major manufacturing company. Provide adequate information to the Controller of your company, so that they can make a decision for one of the following situations:

1.Accept an order at a special price

2.Make or buy component parts or finished products

3.Sell or process further them further

4.Repair, retain, or replace equipment

5.Eliminate an unprofitable business segment or product

Replies: You are the Controller of this major manufacturing company. Show your work and tell the manager what the best decision is for the company in the situation presented.

Answer 1

1. Accept an order at a special price.

Acceptance of an order at a special price should be analyzed on grounds of cost and revenue. The order should be accepted only if the revenue associated with it exceeds the costs and present sales should not be affected by it. Another point to consider is, the organization must have the ability to complete the special order. It means it should have enough manpower and equipment to complete the order.

2. Make or buy component parts or finished products.

Make a component part or finished goods include expenses related to cost of materials, additional labor required to produce the items, storage requirements, storage cost and proper disposal of any remaining parts from the production process.

Buying a components or finished products include costs related to the purchasing of products from an outside vendor, price of the product, shipping or importing charge. Also the storage cost and cost of labor associated with bringing the product to the inventory.

3. Sell or process further them further

Whether to sell a product now or process it further depends on the analysis of whether the additional revenues to be gained by further processing will exceed the additional costs. If the additional revenues exceeds then go for it, otherwise sell it in order to avoid extra costs. For example, if milk can be converted to butter or ghee at an additional cost of $1, then it is good to process the milk further because butter or ghee can be sold at a high price than milk.

4. Repair, retain, or replace equipment

In order to take decision regarding repair, retain or replacement of an equipment we need to consider the following points:

a)Cost Analysis: Consider long-term analysis of costs while repairing or replacing. For purchasing a new equipment, consider the cost of purchasing, its service life, operating costs and any revenue it may bring. For repairing an old equipment, consider its remaining life, operating costs and its market value.

b) Age of Equipment: Generally, older equipment need more repairs. In other words, its maintenance cost will be high when you want to retain it. You may replace it for a new one to save costs and get better efficiency and longevity.

c) Downtime: Consider the downtime when deciding to repair an equipment. if it takes several hours to repair and if it happens frequently, then it is better to replace than repair.

5. Eliminate an unprofitable business segment or product

Eliminating an unprofitable business segment or product depends on the analysis of the following factor.
A business segment involves various fixed and variable assets, if the business is not profitable then the company has to incur huge loss. So it is better to eliminate an unprofitable business segment. Eliminating a single unprofitable product will not provide enough solution to a business which is totally unable to cover its costs. So it is good to shift the entire unprofitable business segment to a more profitable business segment.