Question

Decision Making with a Strategic Emphasis

Presto! Inc.

Presto! Inc. is a wholesale distributor supplying a wide range of moderately priced cooking equipment to large chain stores. Presto! has an enviable reputation for quality of its products. With the explosion of the healthy eating and organic phenomenon and the current open concept in housing, there is a significant uptick in the “at home foodie”. In fact, the demand for Presto!’s products is so great that at times Presto! cannot satisfy the demand and must delay or refuse some orders, in order to maintain its production quality. Additionally, Presto! purchases some of its products from outside suppliers in order to meet the demand. These suppliers are carefully chosen so that their products maintain the quality image that Presto! has attained. About 60 percent of Presto!'s products are purchased from other companies while the remainder of the products are manufactured by Presto!. The company has a Metals Department that is currently manufacturing the pans for the cooking set. Presto! is able to manufacture and sell 15,000 sets of pans annually, making full use of its machine capacity at available workstations. Presented below are the selling price and costs associated with Presto!'s cooking pans.

Selling Price per Set: $250

Cost per Set:

Molded Plastic $25

Aluminum 75

Machine time ($16/hr) 24

Manufacturing overhead 18

Selling and admin. cost 15 $157

Profit per set of pans $93

Because Presto! believes it could sell 24,000 sets of pans annually if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the pans for distribution. HotStuff Inc., a steady supplier of quality products, would be able to provide 18,000 sets of pans per year at a price of $175 per set delivered to Presto!'s facility. Jack Petrone, Presto!'s product manager, has suggested that the company could make better use of its Metals Department by manufacturing high-end cutlery. To support his position, Petrone has a market study that indicates an expanding market for high-end cutlery and a need for additional suppliers. Petrone believes that Presto! could expect to sell 36,000 sets of high-end cutlery annually at a price of $260 per set. Petrone's estimate of the costs to manufacture the cutlery is presented below.

High-End Cutlery data

Selling Price per Set: $260

Cost per Set:

Molded Plastic 25

Carbon Steel 175

Machine time ($16/hr) 8

Manufacturing overhead 6

Selling and admin. cost 14 $228

Profit per set of pans $32

Other information pertinent to Presto!'s operations is presented below. An allocated $6 fixed overhead cost per unit is included in the selling and administrative cost for all of the purchased and manufactured products. Total fixed and variable selling and administrative costs for the purchased pans would be $10 per set. In the Metals Department, Presto! uses machine hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $90,000 of fixed, factory-wide manufacturing overhead that has been allocated to the Metals Department. REQUIRED: To maximize Presto! Inc.'s profitability, recommend which product or products should be manufactured and/or purchased. This recommendation should be supported by an analysis based on the data presented that will show the associated financial impact. (This means compare the current product manufacturing decision with your proposed decision). Support your answer with appropriate calculations and strategic considerations. Hint: The first step is to separate all costs into their respective fixed and variable components.

Answer 1