INTRODUCTION
In order to stay competitive in an industry with an increasing number of players, companies have to be able to stay on top of their costs, as well as that of their competitors. Costing is a very tricky business in itself. Companies are wont to making costing mistakes by going with the wrong assumptions.
The case of Tork versus LG shows how Tork conducts its breakdown of competitor costs in order to come up with strategies that will eliminate the costing advantage of LG. Tork is also burdened by an additional dilemma of continuing to produce low-end units or buying from LG, as well as deciding whether to pursue a legal battle against LG for dumping - that is, selling its products below cost.
CASE CONTEXT
LG
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We made some analysis as to the effects of reducing costs by making material costs similar for Tork and LG, while maintaining fixed cost and labor as they are. We found out that despite this cost reduction in material cost, the costs of producing the low -end units for
Tork will still be more expensive than sourcing them from LG (Appendix 2, Table 3).
Another way to look at the relevant cost savings is by looking at the savings incurred as a result of avoidable costs should Tork stop production of its Model A units. Obviously, with the continued production of the other models, Tork will still incur the fixed costs. This is presented in the Appendix 2,
Table 4. In this scenario, Tork will only be able to save about $66.75 Million. However, in the same table, we can see that fixed costs total to around $67 Million. So the savings that Tork will get from purchasing
LG units will not be able to cover the entire total fixed costs, although it is able to cover about 99.63% of the total fixed costs.
THP Group 2
Case Study on Make-or-Buy Decisions: Tork Corporation
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With a decision to purchase from LG for the Model A units, we then tried to calculate LG’s costs based on the assumptions stated in the preceding section (Item d, under Quantitative analysis).
Since material cost is one of the key cost drivers for the production of the units, it is best to take
Total contribution needed to cover the old fixed costs + new fixed cost + profit is just the three factors added together.
* If the contract were to require new fixed costs in addition to variable costs at 10 % the total Margin cost would be $ 79,524 which would be a substantial increase of $8,056 from question 1
Only the incremental costs and benefits are relevant. In particular, only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation. The other manufacturing overhead costs are fixed and are not affected by the decision.
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.
As we continue to move toward the end our quarterly objectives. I wanted to take the time to explain some of our costs. In our particular field of designing and manufacturing products, we are always engaging in ways that we can mitigate loss and improve our processes. Performing such changes will give a stronger presence in the market by allowing us to remain competitive.
The budget analysis shows that the labor hours of the firm are higher than the budgeted amount. As such, the firm needs to evaluate the cost benefit analysis of making or buying their products. To make this decision, various factors need to be considered. Before making the decision, Peyton needs to evaluate the marginal costs and revenue of making versus buying the products. The firm should take the option which provides the highest marginal profit which is the
The company can afford to invest more fixed costs and variable costs (shifting assets from “A” to “C”) for additional “C” capacity thereby maximizing capacity utilization.
* Least expensive of the three strategies due to the lack of excess inventory and employee overtime
In order to meet customer demands for higher product quality, to comply with federally-mandated environmental regulations, and to reduce production costs, HCC must spend $2,000,000 within the next three years to upgrade equipment. The upgrade is expected to result in production efficiencies that will lower material and labor costs by reducing defective products, process waste, in-process inventory, and production man-hours through simplified work processes. It has been over a decade since significant modifications were made to the production facilities. Those changes were mostly technical in nature and did not substantially alter work processes or reduce overall employment. The average productivity gain in the industry for the past five years has been 3% per year. Financing for the loan to purchase the equipment
On the other hand, fixed cost is a sunk cost unless the plant shutting down, thus it is irrelevant. As a result, EROW should manufacture as much as possible in its plant before transferring from NASA.
• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.
7. Though numbers given in the cost data can not be contested, I would definitely contest the way total cost has been computed. The item 345 department operates within a large manufacturing facility that churns out number of other products too. Hence judging the profitability of item 345 on the basis of total cost is not practical.
In a desire to increase the company’s working capital for the company’s future financial investment in a plant modernization and expansion program, Beauregard Textile Company increased the price of its Triaxx-30 product to bring its profit margins up to that of their other products. In a sequential-move game theory Calhoun & Pritchard, Beauregard’s primary rival, did not raise its price even though its costs were assumed to be similar. As a result, Beauregard’s unit sales dropped significantly as their customers purchased the cheaper competitor’s product, causing Beauregard’s profit contribution to decrease. A closer examination of Beauregard’s cost analysis revealed that it includes fixed costs, which when
The above graph suggests that volume based computation of overhead costs does not reflect the real overhead costs based on actual production per product line (computed maximum in excess over actual). On the other hand, if we follow the allocation of overhead costs based on prime costs as illustrated in Exhibit 2 of the case, we need to consider other quantitative factors: 1. No data is available to determine the amount of raw materials used in producing each of the products. While we can assume that the production of small, colored glass ornaments uses fewer raw materials (e.g. glass) than large, colored glass ornaments, the amount of glass used to produce specialty ornaments cannot be derived from the facts of the case. 2. There is also no data available to determine the number of direct labor hours consumed for producing each product type, although evidently, specialty ornaments use more direct labor hours. Based on the above considerations, we deem it inaccurate to base overhead on prime costs, a common practice in traditional costing. In addition,
Furthermore, the ACC strategy of offering increased variety requires shorter production runs which inherently increases the cost associated with each product and packaging, as idle time due to process changeover would increase between each product production (4.8% of time com-pared with 2% for DJC). The strategy of increased variety and production runs by the ACC would also affect labor in a number of ways. Direct labor costs would go up due to a larger amount of idle time associated with process changeover and the chance of increased problems associated with the