James Manufacturing and Technology (JMT) manufactures private-label small electronic products such as alarm clocks, calculators, kitchen timers, stopwatches, and automatic pencil sharpeners.The company is located in Waycroft, Ga.Some of the products are sold as sets, and other are sold individually.Products are studies as to their sales potential, and then cost estimates are made.The Engineering Department develops productions plans, and then production begins.The company has generally had very successful product introductions.Only two products introduced by the company have been discontinues.
One of the products currently sold is a multi-alarm clock. The clock has four alarms that can be programed to sound at various times and for varying lengths of time. The company has experienced a great deal of difficulty in making the circuit boards for the clocks.The production process has never operated smoothly. The product is unprofitable at the present time, primarily because of warranty repairs and products recalls. Two models of the clocks were recalled, for example, because they sometimes caused an electric shock when the alarms were being shut off.The Engineering Department is attempting to revise the manufacturing process, but the revision will take another 6 months at least.
The clocks were very popular when they were introduced, and since they are private-label, the company has not suffered much from the recalls.Presently, the company has a very large order for several items from Target stores.The order included 7,000 ;of the multi-alarms clocks.When the company suggested that Target purchase the clocks from another manufacturer, Target threatened to rescind the entire order unless the clocks were included.
JMT has there investigated the possibility of having another company make the clocks for them.The clocks were bid for the Target order based on an estimated $9.52 cost to manufacture:
Circuit board, 1 each @ $2.25.........................$2.25
Plastic case, 1 each @ $1.00............................1.00
Alarms 4 @ $.15 each........................................60
Labor:20 minutes at $14/hour......................4.67
Overhead,$3.00 per labor hour ..................1.00
JMT could purchase clocks to fill the Target order for $15.75 per clock from Northwestern Tech, a west coast manufacturer with a very good quality record.Northwestern has offered to reduce the price to $10.75 after JMT has been a customer for 6 months, placing an order of at least 1,000 units per month.If JMT becomes a "preferred customer" by purchasing 15,000 units per year, the price will be reduced still further to $6.45 per clock.
Doo-Tech Producers, a local manufacturer has also offered to make clocks for JMT.Doo-Tech has offered to sell 7,000 clocks for $5.80.However, Doo-Tech has been in business for only 6 months.The company has experienced significant turnover in its labor force, and the local press has reported that the owners may face tax evasion charges soon.The owner of Doo-Tech is an electronic engineer, however, and the quality of the clock is more likely than not to be good.
IF JMT decides to purchase the clocks from either Northwestern Tech or Doo-Tech Producers,all of the costs to manufacture could be avoided, except a total of $6,500 in overhead costs for machine depreciation.The machinery is fairly new and has not alternative use.
I.You have been hired as an outside consultant to help JMT make a decision.The president, James Madison Turner, as asked you a couple of specific questions:
a. What is the difference in profit under each of the alternatives if the clocks are to be sold for $21 each to Target?
b. What are the most important nonfinancial (qualitative) factors that JMT should consider when making this decision?
2.Write a letter to Mr. Turner that (A) provides a recommendation as to what JMT should do in regard to the Target order; (B) answers Mr. Turner's two questions noted above and (C) addresses what JMT should do in regard to continuing to manufacture the multi-alarms clocks.