Question

You will complete all 4 questions from case 13.1.... all responses must hit the minimum of 5-7 sentence length with evidence (per question)

Eddie & Company: Exceeding the Relevant Range

Eddie & Company is a small manufacturer located in the North Central part of the United States. The company manufactures auto and truck axles for automobile producers. Most of its output is sold to one of the larger auto companies. Because its sales have recently increased beyond all expectation, that company now wants Eddie & Company to increase its production level to satisfy the increased demand.

This request poses a serious dilemma for the owners of Eddie & Company. It would have to considerably increase production in order to ship more axles to the automaker. However, it has already been operating at full capacity just to meet the demands of its customers, including the automaker, when sales were low. The only ways to satisfy the increased demand would be (1) to buy the needed new products from its competitors and resell them to the automaker—at no profit—or (2) to increase its own production capacity in order to satisfy the demand.

The first alternative would satisfy the short-run increase in demand, but not the long-range one. But the second alternative of increasing production capacity would pose different problems. First, there is no assurance that the increased demand from the automaker will be permanent, and Eddie & Company could find itself with unused capacity. Second, this alternative would mean increased fixed expenses, which would raise the company’s break-even point. And this increase would continue even if the automaker cut back its orders to the original level.

Questions

1. What options are available to the company?
2. What would you do if you faced the same situation?
3. Would you buy the product from your competitor to meet the contract? Explain.
4. Would you add the additional capacity? Explain.

Answer 1

1. What options are available to the company?

The options that are available to the company are to either buy the needed new products from its competitors and resell them to the automaker which would give them no profit, or to increase its own production capacity in order to satisfy the demand.

2. What would you do if you faced the same situation?

If I were facing the same situation I think that I would choose the first option. The first option is to buy the needed products from a competitor and resell them. I know there would be no profit, and that is unfortunate, however, I think the second option is much too big of a risk for the company to take. If the increased demand from the automaker is not a permanent demand then the company may find itself with too much product and no buyer. This would also mean increased fixed expenses that would raise the company’s break-even point, and this increase would continue even if the automaker cut back its orders. At least with the first option I would meet the current demands, keeping the automakers business and giving me time to consider expanding production slowly if I feel that the automaker will continue to want our business.

3. Would you buy the product from your competitor to meet the contract? Explain.

I think that I would do everything else possible first and leave buying from my competitor at the very end of my options. I would look into hiring seasonal workers and ordering more product for that specific order from the automaker in order to complete that demand. While that is happening, I would do my part by communicating with the automaker on their future purchases and maybe consider creating a contract with them that would ensure that they will be purchasing at this higher demand for a specific amount of time. Then I would increase our production level after contracts are signed which give us the assurance and protection that the automaker will not cut back its orders.

4. Would you add the additional capacity? Explain.

I would add the capacity if the automakers go into contract with us stating that they will be purchasing at this higher level for a long period of time.

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