Catawba Industrial Company currently manufactures only standard compressors. Marge McPhee, general manager of the compressor-manufacturing department is considering implementing a new production run, which includes lightweight compressors. Our analysis was based on the following assumptions: •Depreciation (prior and future capital investment) is considered sunk cost •Price for standard compressor is $10,000 for irrespective of (Q) •Price for lightweight compressor is discreet in $500 increments and cannot be obtained until quantity for next tier is met
Question number 2, is “If Marge McPhee decides to manufacture ten light weight compressors each week and to sell them at a price of $ 8,000, how much better or worse off financially would Catawba be? ” Our Analysis shows that the gross margin for the standard compressor (Figure 1 at left) is $53,905, at a capacity of 24 units. By producing the 10 lightweight compressors, the capacity to produce standard compressors is reduced to 17 units.
The combined gross margin for standard and lightweight compressors is $76,081; thereby, Catawba increases gross margin by $22,176 by adding the lightweight compressor to the production run (Figure 2 below). We were then asked to consider, question 3, “What production plan for standard and light weight compressors would result in the highest financial return for Catawba? ” To analyze which capacity mix provided the highest financial returns, we examined the following capacity mixes: 1)Maximum capacity of producing all lightweight compressor 2)Maximum capacity of producing all standard compressor )Combination of producing standard and lightweight compressors; production run begins with lightweight compressor. 4)Combination of producing standard and lightweight compressors; production run begins with standard compressor. While examining the various capacity mixes, we leveraged the fact that gross profit margin for a single lightweight compressor was 49. 34% versus 24. 71% for the standard compressor.
Capacity mix 1 below, maximum capacity of producing all lightweight compressor (limited by forecasted demand of 30), illustrates that the gross margin is $58,419. Capacity mix 2, maximum capacity of producing all standard compressor, illustrates that the gross margin is $53,905. Capacity mix 3, combination of producing standard and lightweight compressors (production run begins with lightweight compressor), illustrates the gross margin is $91,474.
Capacity mix 4, combination of producing standard and lightweight compressors (production run begins with standard compressor), illustrates the gross margin is $95,489. As a result of our analysis, we advise Marge McPhee to utilize the capacity mix number 4 in order to maximize the highest financial return for Catawba. She should begin her production run using 10 standard compressors and 22 lightweight compressors, which provides a gross margin of $95,489. Per figure 3, the payback period is 15. 27 weeks.
