Problem
The Smiths Falls Times assembles sports watches. The watches consist of three main components, Quartz mechanism, the case and the strap. SFC sources components from outside and assembles the watches in its factory.
Extensive customer survey have established that there are three main functions for the watches in the niche that SFT has chosen; time, water resistance and style. Time is provided by the quartz mechanism; water resistance and style are provided by the case ad the strap. Replaceable batteries power all the watches. However, once the case is opened to replace the waterproof nature of the watch is usually lost.
Market surveys have established three price points for the three new watches that SFT now has in its design stage: (1) $30 for a basic watch (2) $50 for a basic chronograph and (3) $120 for a multifunctional watch. SFT ha determined, given its facility-sustaining costs and its cost of capital, that three watches must provide a margin of $4, $8 and $15 to be acceptable.
Based on initial specification the supplier of quartz mechanisms has quoted price of $8, $15 and $40 for the three watches. Because these mechanisms use standard components and well-known technology, planners at SFT consider these costs to be as low as they can be. The implication is that any needed target cost reduction will not be wrung out of the quartz mechanism.
There are many sources for the wrap straps, and the prices vary widely based functionality, which include appearance, composition and wear. Suppliers' quoted price ranges for the three watches are as follows: $2-$7, $6-$9 and $20-$30. For any given level of functionality chosen there is little price variation among suppliers because the watchstraps are commodity products produced cost effectively.
The case provides two critical functions - style and water resistance. All cases have to be guaranteed to a depth of 50m minimums and customer focus group show that they find a guaranteed depth of 100 meters more desirable. Depending upon style and degree of water resistance the supplier quoted the following price ranges for the watchcases: $5 -$15, $10 - $25 and $20 - $35. Both style and water resistance increased in the product price.
Conversations with factory personnel indicated that the estimated costs of assembling, packaging, and shipping each watch were about $5, $7 and $15. For an investment estimated at about $5,000,000 SFT could provide management advice to one of its suppliers. This advice would be related to developing better manufacturing methods. These improved methods would likely reduce the cost of each case supplied by about 25%.
Required:
a) Compute the cost ranges for the three watches
b) Identify how you would choose the specific strap and case for each watch.
c) How would you decide whether to make the investment to improve the efficiency of the case supplier?
d) Factory personnel indicate that for an investment of about $10,000,000 the existing factory layout could be altered to accommodate more-efficient production. The result would be to reduce assembly, packaging and shipping costs by about $2 per unit. How would you decide whether to make this investment?