Case Problem:
Maxitek Company manufactures small electronic products, such as alarm clocks, calculators, kitchen timers, stopwatches and automatic pencil sharpeners. Some of products are sold as sets and others are sold individually. Products are studied as to their sales potential, and then cost estimates are made. The engineering department develops production plans, and then production begins. The company generally had very successful product introductions. So far only two products introduced by the company have been discontinued.
One of the products currently sold is a multi-alarm clock. The clock has four alarms that can be programmed 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 present time, primarily because of warranty repairs and product recalls. Two models of the clock were recalled, for example, because they sometimes caused 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 six months at least.
The clocks were very popular when they were introduced. Presently the company has received a very large order for several items from Kmart stores. The order includes 5,000 of the multi-alarm clocks among other items. When maxitech suggested Kmart to purchase the multi-alarm clocks from another manufacturer, Kmart threatened to cancel the entire order unless the clocks were were included. The clocks were sold to Kmart for $14.50 each and the Kmart order is based on an estimated per unit manufacturing cost of $6.90 as follows:

Circuit board – 1 each @$2.00 $2.00 Plastic case –1 each @$0.80 $0.80 Alarms – 4 @ $0.15 each $0.60 Labor – 15 Minutes @12 / hour $3.00 Overhead - $2.00 per labor hour $0.50

Total $6.90

Faced with the dilemma of engineering difficulties and the potential threat of losing orders from a large chain store like Kmart, Maxitek started to investigate the possibility of having another company making the clocks for them.

It has discovered that Maxitek could purchase the clocks from an outside supplier at $10 each from TransTech Asia, a Korean manufacturer with a very good quality record, and thus fulfill the Kmart order. TransTech has offered to reduce the price to $7.50 if MaxiTek remains a customer for six months and placing an order of at least 1,000 units per month. If MaxiTek purchases 15,000 units per year, it will become a “preferred customer” and the price would be reduced still further to $4.50 each. Omega Products, a local manufacturer, has also offered to make clocks for MiniTek. They have offered to sell 5,000 clocks for $5 each. However, Omega Products has been in business for only 6 months. They have experienced significant turnover in their labor force, and the local press has reported that the owners may face tax evasion charges soon. The owner of Omega Products is an electronic engineer, however, and the quality of the clocks is likely to be good. MaxiTech management is also aware of the fact that if they purchase the clocks from TransTech or Omega, all the cost to manufacture could be avoided except a total of $5,000 in overhead costs for machine depreciation. The machinery is fairly new, and has no alternate use. Considering all the constraints and options Maxitek has decided to buy the 5,000 units of clocks for, TransTech Asia at $7.50 each. Required: A. Analyze the strategic decision problems, choices and constraints faced by Maxitek. MaxiTek is in dilemma whether they make or buy clocks from different clock manufacturers, in order to cut their cost or increase their revenue. They’ve received a large order (5,000 Units) from Kmart stores for several items, but the problem Kmart wanted the clocks to be included as their estimated per unit manufacturing cost of $6.90. Later on, MaxiTek discovered two other outside suppliers. Both of outside suppliers TransTech and Omega offered different deals depending on number of units sold and duration of doing business. TransTech has offered 3 different choices. * The 1st one was selling at $10 each, which is unfavorable to Maxitek. * 2nd offer was at $7.50 if MaxiTek remains a customer for six months and placing an order of at least 1,000 units per month. * 3rd offer which was the best among them all, were Maxitek purchases 15,000 units per year @$4.50 each. Well, in other hand OMEGA offered to sell 5,000 clocks to MaxiTek @ $5.00 each, but the main issue is OMEGA seems not trust worthy, because they were new in business and had experienced significant turnover in their labor force, and the owners may face tax evasion charges soon.

B. What, in your opinion, are the most significant financial and non-financial implications of this decision?

It’s much better for MaxiTech to buy from other suppliers rather than making clocks, because it saves time and cost. To be particular, at the beginning deal with omega, if your business did well, then go for TransTech 3rd option, were the number of units are high, but all you have to do is sell in big amount.

C. What would be the difference in profit/loss between the alternative accepted and the two alternatives that were rejected (namely producing in-house, and outsourcing from Omega)? | Make | Buy TransTech | Buy Omega | Sales Revenue | $14.50 $14.50 $14.50 | Variable Manufacturing Cost: | Circuit Board | 2.00 | 0 | 0 | Plastic Case | 0.80 | 0 | 0 | Alarms (4 @ $.15 each) | 0.60 | 0 | 0 | Labor | 3.00 | 0 | 0 | Overhead | 0.50 | 0 | 0 | Purchase Cost | 0 | 10.00 | 5.00 | FC | - | 1.00 | 1.00 | Total MC | 6.90 | 11.00 | 6.00 | Profit Per Unit | $7.60 | $3.50 | $8.50 | Total Profit $38,000 $17,500 $42,500 | * Fixed cost cannot be avoided, so $5,000 for overhead depreciation machine cost is incurred, whether the product is manufactured or not. * $5,000 of cost divided by 5,000 units= 1 Total Profit Calculation: For Kmart $7.60*5000 units= $38,000 For Omega $8.50*5000 units= $42,500 TransTech 3 alternative Choices: @$10 For TransTech $3.50*5000 units= $17,500 Profit @$7.50 for TransTech $6.00*5000 units= $30,000 Profit @$4.50 for TransTech $9.00*15,000 units= $135,000 Profit 15,000 units per year is minimum * If the company deals with OMEGA, then the gap will be $42,500 - $38,000= $4,500 less * If the company deals with Transtech @ $10, then the gap will be $42,500- $17,500= $25,000 less * If the company deals with Transtech @ $7.50, then the gap will be $42,500- $30,000 = $12,500 less D. What are the most important positive and negative non-financial implications for each of the three options? The positive thing is MaxiTek is lucky to deal with a big company such as Kmart, moreover, they didn’t wanted to cut their bridge with Kmart, so they decided to fullfil Kmart requirements by looking at different watch suppliers from outside. No doubt their business will continue in future if MaxiTek followed their business procedures professionally. Well, so many negative things happened in the case. MaxiTek is facing serious manufacturing the clocks issues, repairs and products recalls. So, it’s better they deal with other watch manufactures, where they will save cost and time. The 2nd option is dealing with TransTech, but the situation is critical, because TransTech is charging high price on short period and we don’t know till when MaxiTek will do business with Kmart or clock industry. Well, if MaxiTek plans to expand their business in future, then it should think about long-term and high ratio of sales. Also it’s much profitable to become “preferred customer” were the price is less than half. 3rd option is Omega, which is looking the most profitable company to deal with, but the main issue is how long they will stay in business or are they trust worthy as they are 6 months in market?!

E. Has Maxitek made the right decision? Why or why not? Justify your Answer. No, because maxitek had two other better options. 1) At the beginning they could deal with omega for short term at price $5.00 to measure their sales or market trend, if their sales went good, then they could go for 2nd better option which: 2) Deal with a good reputation company such as Transtech at lower price $4.50 in 1 year