Question

Hot & Cold and Caldo Freddo are two European manufacturers of home appliances that have merged. Hot & Cold has plants in France, Germany, and Finland, where Caldo Freddo has plants in the United Kingdom and Italy. The European market is divided into four regions: North, East, West, and South. Plant capacities (millions of units per year), annual fixed costs (millions of euros per year), regional demand (millions of units), and variable production and shipping costs (euros per unit) are listed in the following table.

		Variable Production and Shipping Costs
		North	East	South	West	Capacity	Annual Fixed Cost
Hot & Cold	France	100	110	105	100	50	1000
	Germany	95	105	110	105	50	1000
	Finland	90	100	115	110	40	850
	Demand are in million units per year
	Demand	30	20	20	35
		Variable Production and Shipping Costs
		North	East	South	West	Capacity	Annual Fixed Cost
Caldo Freddo	U.K.	105	120	110	90	50	1000
	Italy	110	105	90	115	60	1150
	Demand are in million units per year
	Demand	15	20	30	20

Each appliance sells for an average price of 300 euros. All plants are currently treated as profit centers, and the company pays taxes separately for each plant. Tax rates in the various countries are as follows: France, 0.25; Germany, 0.25; Finland, 0.3; UK 0.2; Italy, 0.35.

1. Before the merger, what is the optimal network for each of the two firms if their goal is to minimize costs? What is the optimal network if the goal is to maximize after-tax profits?

Answer 1

Hot & Cold Company
France 50 units capacity	North	East	South	West
Demand			30	20	20	35
Variable cost pu		100	110	105	100
Sales	300 pu		9000	6000	6000	10500
Variable cost		-3000	-2200	-2100	-3500
Contribution		6000	3800	3900	7000
Contribution pu		200	190	195	200
Preference		1	3	2	1
	Units	Contribution pu	Total Contribution
West	35	200		7000
North	15 B.F	200		3000
				10000
		Less Fixed Cost	-1000
		Profit		9000
Germany 50 units capacity	North	East	South	West
Demand			30	20	20	35
Variable cost pu		95	105	110	105
Sales	300 pu		9000	6000	6000	10500
Variable cost		-2850	-2100	-2200	-3675
Contribution		6150	3900	3800	6825
Contribution pu		205	195	190	195
Preference		1	2	3	2
	Units	Contribution pu	Total Contribution
North	30	205		6150
East	20	195		3900
				10050
		Less Fixed Cost	-1000
		Profit		9050
Finland 40 units capacity	North	East	South	West
Demand			30	20	20	35
Variable cost pu		90	100	115	110
Sales	300 pu		9000	6000	6000	10500
Variable cost		-2700	-2000	-2300	-3850
Contribution		6300	4000	3700	6650
Contribution pu		210	200	185	190
Preference		1	2	4	3
	Units	Contribution pu	Total Contribution
North	30	210		6300
East	10	200		2000
				8300
		Less Fixed Cost	-850
		Profit		7450
CALDO FREEDO
UK 50 units capacity		North	East	South	West
Demand			15	20	30	20
Variable cost pu		105	120	110	90
Sales	300 pu		4500	6000	9000	6000
Variable cost		-1575	-2400	-3300	-1800
Contribution		2925	3600	5700	4200
Contribution pu		195	180	190	210
Preference		2	4	3	1
	Units	Contribution pu	Total Contribution
West	20	210		4200
North	15	195		2925
South	15	190		2850
				9975
		Less Fixed Cost	-1000
		Profit		8975
Italy 60 units capacity	North	East	South	West
Demand			15	20	30	20
Variable cost pu		110	105	90	115
Sales	300 pu		4500	6000	9000	6000
Variable cost		-1650	-2100	-2700	-2300
Contribution		2850	3900	6300	3700
Contribution pu		190	195	210	185
Preference		3	2	1	4
	Units	Contribution pu	Total Contribution
South	30	210		6300
East	20	195		3900
				10200
		Less Fixed Cost	-1150
		Profit		9050
Hot & Cold Company
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