Problem - CVP Analysis; Strategy; Uncertainty Computer Graphics (CG) is a small manufacturer of electronic products for computers with graphics capabilities. The company has succeeded by being very innovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), CG management has extensive experience in both marketing and manufacturing in the electronics industry. A long list of equity investors is betting that the firm will really take off because of the growth of specialized graphic software and the increased demand for computers with enhanced graphics capability. A number of market analysts say, however, that the market for the firm's products is somewhat risky, as it is for many high-tech startups, because of the number of new competitors entering the market and CG's unproven technology.
CG's main product is a circuit board (CB3668) used in computers with enhanced graphics capabilities. Prices vary depending on the terms of sale and the size of the purchase; the average price for the CB3668 is $100. If the firm is able to take off, it might be able to raise prices, but it also might have to reduce the price because of increased competition. The firm expects to sell 150,000 units in the coming year, and sales are expected to increase in the following years. The future for CG looks very bright indeed, but the company is new and has not developed a strong financial base. Cash flow management is a critical feature of the firm's financial management, and top management must watch cash flow numbers closely.
At present, CG is manufacturing the CB3668 in a plant leased from ElecTech using some equipment purchased from ElecTech. CG manufactures about 70% of the parts in this circuit board.
CG management is considering a significant reengineering project to significantly change the plant and manufacturing process. The project's objective is to increase the number of purchased parts (to about 55%) and to reduce the complexity of the manufacturing process. This would also permit CG to remove some leased equipment and to sell some of the most expensive equipment in the plant.
The per-unit manufacturing costs for 150,000 units of CB3668 follow:
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Current Manufacturing Costs
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Proposed Manufacturing Costs
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Materials and purchased parts
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$6.00
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$15.00
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Direct labor
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12.50
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13.75
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Variable overhead
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25.00
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30.00
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Fixed overhead
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40.00
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20.00
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Manufacturing information for CB3668:
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Number of setups
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3,000
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2,300
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Batch size
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50
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50
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Cost per setup
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$300
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$300
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Machine hours
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88,000
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55,000
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General, selling, and administrative costs are $10 variable cost per unit and $1,250,000 fixed; these costs are not expected to differ for either the current or the proposed manufacturing plan
Required -
Compute the contribution margin per unit and the breakeven point in units for CB3668, both before and after the proposed reengineering project. Assume all setup costs are included in fixed overhead.
Determine the number of sales units at which CG would be indifferent as to the current manufacturing plan or the proposed plan.
Use Goal Seek in Excel to confirm your answer to requirement 2.
Explain briefly (a) what CG's strategy is, (b) what you think it should be, and (c) why.
Should CG undertake the proposed reengineering plan? Using a spreadsheet, support your answer with sensitivity analysis and a discussion of short-term and long-term considerations.