Cases in Cost Management

Business

Quiz 21 :
Montclair-The Deep Co or Grades

Quiz 21 :
Montclair-The Deep Co or Grades

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Break the 1986 profit of $9.5 million down between fasteners and attaching machines (rough approximation to the nearest million is sufficient). What inferences do you draw about the relative profitability of these two segments of the business
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Estimation of profit break up for 1986 between two segment of business Attaching machines and Fasteners:
Refer to Exhibits 1 and 2 to prepare the product line profit break-up for the year 1986.
Prepare the product line profit break-up for the year 1986:
img Note:
1. GENERAL OVERHEAD DEPARTMENT
Factory Support and Supplies: Fully consumed by fastener production.
Technical Administration: 20% of cost was for fastener production.
Support Departments: Included costs for production scheduling, quality control, fastener inventory control, the apprentice workshop, and the worker council.
Machining Department: The entire cost' of ($2,4M) toward this department was charged to expense directly to the fastener business.
Tooling Department: Divides for fastener and machines manufacturing on the basis of manufacture of tools.
From the above profitability break-up, the following inferences are drawn :
• The primary business of this case is Fasteners.
• Machines are only the "Delivery system."
• When there is doubt whole charge is concern to Fasteners, the primary business.

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One can view the production and leasing of an (automatic) attaching machine as a multi-period "annuity." Money is spent in year zero in order to generate a stream of cash flows (positive net cash flows, hopefully) over an average of ten years. After ten years, a machine is renovated and then generates positive cash flows again for another ten years, on average. Try to structure the time-phased cash flows for this annuity for an "average" automatic attaching machine using 1986 costs and prices. Estimate the Internal Rate of Return (Economic Rate of Return) for the annuity. How does this calculation change your thinking, if at all, about the profitability of the attaching machines segment of the business
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Computation of economic return of Automatic attaching machines:
Economic rate of return :
It denotes the interest rate at which the investment cost and expected cash flows (benefits) discounted over its life, are being equal. It is calculated by following formula:
img By extracting the information:
img img img img img img img Step 1: To calculate cost of investment annuity for one automatic attaching machine;
img Step 2: To calculate annuity/current value of investment for one automatic attaching machine;
img Step 3: To calculate Economic rate of return;
img Substitute:
img The above calculation suggests that the attaching machine segment is a highly profitable business because it yields a good economic return.

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How would you characterize ML's business strategy in 1986 Is it reasonable
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During 1986 Japanese M/s Hiroto Industries entered in the European market, sold same quality fasteners products at 20% less price than that of ML. ML offered fasteners products which were assemble compatibility only with their manufactured attaching machines product, but Hiroto Industries produced fasteners products are compatible with others ML's attaching machines also. This least price range and a better assembling compatibility of Hiroto's fasteners made the customers gradually drift in the direction of Japanese manufacturer's products. Therefore, this has finally become a better trade for the distributors also, which later choose Japanese make.
From the above reasoning it has been putted that ML's strategy was a partial failure because it wasn't prevent itself from uncertain competition that from Japanese company.
Further the business strategy adopted by ML during 1986 to expand the sell for high-end fasteners may include the following reasoning:
• ML was packaging the attaching machines price with their snap fasteners price. These strategies of bundling of two products keep increases the market for fasteners.
• By this strategy the fasteners price can be cut down by 20% without doing any compromise with the products quality out of which ML will still generate a profit ranging from 38% to 48%.
The above reasoning shows the proposed and adopted strategies were really effective and reasonable to track.

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A. Calculate profitability for the four products in Exhibit 4 excluding the impact of attaching machines cost which is part of general manufacturing overhead. The calculations here require more thinking than crunching. B. Following on from 4(A), what is your assessment of the overall relative profitability of the four product categories
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What is the annual attaching capacity for all the ML machines in the field Compare this to ML's unit sales volumes for all four categories together. What inferences do you draw
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Consider the pricing issues and product line issues for fasteners and machines by focusing on Exhibit 5 and Question 5.
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What specific recommendations do you have for management regarding "bundling," pricing for fasteners, and pricing for attaching machines
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