Homer and the Introduction of the BartoQ9
Homer Industries, a Springfield, OR company, plans to introduce itsnew line of Digital Watches. The company has invested $7,250,000 inR&D to develop its most recent product, The BartoQ9.
Mr. Smithers, the company CEO, has asked you for guidance inlieu of the manufacturing options available at this time and thedistribution agreement that he signed 2 days ago. Homer Industrieshas not reached a decision about where to manufacture the productto enter the US market for Christmas 2018. The followinginformation is available.
Manufacturing options
A) Juarez Mexico. The Beechos SA de CV can manufacture up to50,000 units this year. Its proposal involves charging MXN400 perunit plus an initial set-up cost of MXN550,000. This set-up cost ispayable immediately and Homer needs to incur in this costregardless of the number of units that the plant will produce.Then, Homer needs to pay $25 for shipping and handling to get theproduct in Homer distribution centers in the US. [note: MXN refersto Mexican Pesos, the exchange rate between US dollars and Mexicanpesos is US$1= MXN 20, assume that the exchange rate will notchange during the year]
B) Marion, Arkansas. The Wolvies can manufacture up to 65,000units this year. The company charges US$65 per manufactured unitplus an initial set-up cost of US25,000. Similar to Beechos, theset-up cost is payable immediately and it is not related to thenumber of units that the plant produces this year or next year. Inaddition, Homer needs to pay about $1.25 per unit in shipping andhandling to have the product ready for distribution throughout theUS by Nov 27 (no delivery possible before this day). There are noother costs. Prices and delivery dates cannot be changed.
Managerial situations
Homer’s management team has negotiated an exclusive agreementwith Nilhaus LLC to use its stores for launching the product. Apromotion involves selling the BartoQ9 at a price of US$198 (taxesincluded). Nilhaus will take a 25% cut (or margin) for receivingand delivering the products to all the stores, and selling thewatch to all the interested parties. Homer will pay US$750,000 forits share in the marketing campaign. Also, the agreement betweenHomer and Nilhaus implies the following:
Homer needs to deliver 40,000 units by Oct 22so Nilhaus can stock its stores before Black Friday.
Homer needs to deliver a second shipment of50,000 by Nov 28
Questions
1. Please tell me how will Homer design its manufacturing ordersto meet Nilhaus’ contract? (hint: check $cost per unit in eachlocation to arrive at better conclusions because you have 2 optionson Nov order)
2. Given the information provided above, and your answer to Q1what are the total costs in US$’s (manufacturing, R&D,marketing, delivery, etc.) for the 90,000 units that Homer expectsto sell in the US for Christmas 2018?
3. Please estimate the total $ revenues that Homer will achieveby selling the 90,000 units to Nilhaus
4. Does Homer be able to make a profit with this product afterits launching in the US? In other words, what will be the totalprofit –or loss- of this project?
5. What is the break even point? (Or, how many units does Homerneeds to sell to compensate all the costs)
