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Athos and Porthos are divisions of Dumas, Inc., operating as profit centers. Both are profitable. One...

Athos and Porthos are divisions of Dumas, Inc., operating as profit centers. Both are profitable. One of the products produced by Athos is A62, which normally sells for $180/unit. Cost is $125/unit (40% variable). Porthos is planning a new product, and is taking bids on one of the subassemblies. A62 would be appropriate for this subassembly with some modification.

a) Discuss the factors Athos should consider when submitting a bid.

b) If Athos does not submit the low bid, might Porthos still benefit from accepting their bid? Discuss briefly.

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Expert Solution

Selling Price of A62 equals to $180 per unit. The unit cost price of producing A62 is $125 out of which 40% is variable component i.e. $75 is fixed costs per unit and $50 is variable costs per unit.

(a) Major factors should be considered when submitting a bid for new product launch by Porthos.

  • Initial capital required to launch new product- Launching the new product require sourcing of capital from various instruments including Equity and debt funds to buy assets and machinery to produce newly launched product
  • Sourcing of capital required - Athos should consider sourcing of funds when submitting a bid. Equity, debt financing both has their advantages and disadvantages. Based on divisional structure and policies they should decide from where they will raise funds for launch of new products.
  • Fixed and Variable costs involved to produce new product- Athos need to consider fixed as well as variable component of producing the product such as materials, wages and salaries and other expenses. Also they should consider expected selling price of new product based on the substitutes products pricing strategies.
  • Scale of Production- Based on the level of Market demand for the newly launched product. Athos need to consider the scale of production to meet the expected demand from the potential customers
  • Profitability and Break-even analysis- Once Athos has decided about scale of operations, they need to consider the time horizon by which new product will have break-even point and expected profit margins from the sale of new product.
  • Return on Investment- While submitting the bid for new product, Athos need to consider the expected ROI. Return on investment is of the major financial ratios to look at before investments in any project or product.
  • Future Cash Flow Projections of new product- Cash flow projections and Net Present Value of future cash flows are good indicators to assess whether to invest in the product or not. Athos should consider future cash flows from the product while submitting the bid.

(b) Porthos will still be benefited from accepting the bid if Athos submit the high bid because of synergies between Athos and Porthos as they both are divisions of same organization Dumas Inc. These both division can take advantage of the cross-functioning teams and structure in the organization. As 60% of the total cost of producing the A62 product in the Athos division are fixed costs, Porthos will get benefit as they won't have to invest in machinery and other assets to produce a new product if they accept high bid of Athos. Porthos need to focus on variable costs involved in producing the new product.

Porthos will also get benefited from the domain knowledge of employees working in Athos as the new product can be produced by A62 product with some modification. Moreover it is better to accept bid from internal division of the company due to domain knowledge and synergies between both the division for long term success of new product.

ekkarill92 answered 10 months ago
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