Question

Homer and the Introduction of the BartoQ9

Homer Industries, a Springfield, OR company, plans to introduce its new line of Digital Watches. The company has invested $7,250,000 in R&D to develop its most recent product, The BartoQ9.

Mr. Smithers, the company CEO, has asked you for guidance in lieu of the manufacturing options available at this time and the distribution agreement that he signed 2 days ago. Homer Industries has not reached a decision about where to manufacture the product to enter the US market for Christmas 2018. The following information is available.

Manufacturing options

A) Juarez Mexico. The Beechos SA de CV can manufacture up to 50,000 units this year. Its proposal involves charging MXN400 per unit plus an initial set-up cost of MXN550,000. This set-up cost is payable immediately and Homer needs to incur in this cost regardless of the number of units that the plant will produce. Then, Homer needs to pay $25 for shipping and handling to get the product in Homer distribution centers in the US. [note: MXN refers to Mexican Pesos, the exchange rate between US dollars and Mexican pesos is US$1= MXN 20, assume that the exchange rate will not change during the year]

B) Marion, Arkansas. The Wolvies can manufacture up to 65,000 units this year. The company charges US$65 per manufactured unit plus an initial set-up cost of US25,000. Similar to Beechos, the set-up cost is payable immediately and it is not related to the number of units that the plant produces this year or next year. In addition, Homer needs to pay about $1.25 per unit in shipping and handling to have the product ready for distribution throughout the US by Nov 27 (no delivery possible before this day). There are no other costs. Prices and delivery dates cannot be changed.

Managerial situations

Homer’s management team has negotiated an exclusive agreement with Nilhaus LLC to use its stores for launching the product. A promotion involves selling the BartoQ9 at a price of US$198 (taxes included). Nilhaus will take a 25% cut (or margin) for receiving and delivering the products to all the stores, and selling the watch to all the interested parties. Homer will pay US$750,000 for its share in the marketing campaign. Also, the agreement between Homer and Nilhaus implies the following:

    Homer needs to deliver 40,000 units by Oct 22 so Nilhaus can stock its stores before Black Friday.
    Homer needs to deliver a second shipment of 50,000 by Nov 28

Questions

1. Please tell me how will Homer design its manufacturing orders to meet Nilhaus’ contract? (hint: check $cost per unit in each location to arrive at better conclusions because you have 2 options on Nov order)

2. Given the information provided above, and your answer to Q1 what are the total costs in US$’s (manufacturing, R&D, marketing, delivery, etc.) for the 90,000 units that Homer expects to sell in the US for Christmas 2018?

3. Please estimate the total $ revenues that Homer will achieve by selling the 90,000 units to Nilhaus

4. Does Homer be able to make a profit with this product after its launching in the US? In other words, what will be the total profit –or loss- of this project?

5. What is the break even point? (Or, how many units does Homer needs to sell to compensate all the costs)

Answer 1

1. It is clear that Homer needs to manufacture at both locations to meet 90,000 demand. On comparing the cost of manufacture at both locations, per unit cost in Mexico is cheaper by $ 21. Hence, Homer must manufacture 50,000 items in Mexico and rest 40,000 in the USA as maximum capacity at Mexico is 50,000.

( Note - On equating both manufacturings equal capacity of 50,000, the cost of manufacturing per unit goes up in the USA by 12 cents)

Please refer below images for all calculation and formula.