Quiz 23: Montclair-The Deep Co or Grades


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.

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.

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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