1. Brunswick Plastics Group # 7 Anirudh Hingle 08FT-064 Arpitaa Kharbanda 08FT-071 Girish Mittal 08FT-076 Kanika Nagpal 08FT-082 Tanmay Mohan 08FT-113

2. Company Background 50 different products at BP Presence in both domestic (Canada) and US markets Estimated sales for 1986 was $1,200,000 ▫Just above the break even level on profits The division under Michael had 20 full-time employees which fluctuated monthly based on demand Reputation as a reliable supplier of high quality products Industry standard in several markets with major customers Pricing was a key to success for securing contracts and profitability

3. Manufacturing at BP Manufacturing was done in two different modes ▫High Volume products ▫Low Volume products High Volume products were made to stock in long run Minimizing set-up costs and maintaining required inventory levels For low volume, production was in response to the specific order

4. Machinery @ BP Five major injection molding presses at BP Machines are of varying ages Experienced frequent down-time because of set- ups, raw material problems, regular repairs etc.. 2 shifts a day and 5 days a week, depending on volume fluctuations even 1 or 3 shifts a day

5. Stages in Manufacturing a Product 1)Set up of machine 2)Production operation 3)Assembly operation 4)Testing operation Set-up, assembly and testing are labor-intensive Labor content varied from product to product

6. Process- Injection Molding Molten plastic is forced into a mold where it is “cured” Curing requires cooling the mold usually with water Product is removed once cured Stationary molds required little manual intervention as compared Removable molds Removable molds required significant labor content since the operation was labor-paced

7. Assembly, Testing time Products varied in terms of assembly and testing time required Products like pediatric syringes used in the care of premature infants which required “clean room” To wheel chocks that required only a cursory inspection and no assembly Other products varied between these two extremes

8. Difficulties Faced- Michael Wide mix of manufacturing, assembly and testing requirements Difficulties caused by machines Machines differed widely in terms of their reliability and their performance Machine had to stopped and reset in-case of machine problem Incorporating the machine failure cost in the product cost difficult as machine stoppages were unpredictable

9. Materials, assembly and testing costs of most products were well understood Material costs could be estimated by the weight of the final product Assembly and testing operations involved the use of highly reliable and labor paced machines

10. The Milk Crate Contract Annual sales volume of the region 3,00,000 units Initial order 1,50,000 units Successful bid price $3 +/- 10 cents Cost structure of $3, will it cover BP’s cost of producing this product??

11. Relevant costs for decision making The costs which should be used for decision making are often referred to as "relevant costs". CIMA defines relevant costs as 'costs appropriate to aiding the making of specific management decisions'. To affect a decision a cost must be: a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are common to all alternatives that we may choose. b) Incremental: ' Meaning, expenditure which will be incurred or avoided as a result of making a decision. Any costs which would be incurred whether or not the decision is made are not said to be incremental to the decision. c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal value is relevant. Other terms: d) Common costs: Costs which will be identical for all alternatives are irrelevant, e.g. rent or rates on a factory would be incurred whatever products are produced.e) Sunk costs: Another name for past costs, which are always irrelevant, e.g. dedicated fixed assets, development costs already incurred. f) Committed costs: A future cash outflow that will be incurred anyway, whatever decision is taken now, e.g. contracts already entered into which cannot be altered.

12. Common Terms Costs: Resources sacrificed to achieve a specific objective, such as manufacturing a particular product, or providing a client a particular service. Sunk costs: These are costs that were incurred in the past. Sunk costs are irrelevant for decisions, because they cannot be changed. Opportunity cost: The profit foregone by selecting one alternative over another. It is the net return that could be realized if a resource were put to its next best use. It is “what we give up” from “the road not taken.” Relevant costs: These are costs that are relevant with respect to a particular decision. A relevant cost for a particular decision is one that changes if an alternative course of action is taken. Relevant costs are also called differential costs.

13. Questions!!!

14. Q: Based on your interpretation of exhibit 3, what is your estimate of the change in “PFMOH” cost if the factory were to run one extra batch of 150,000 milk crates?

15. PMFOH – Planned fixed manufacturing overhead Change in PMFOH = 3681 + (4.86 * MH) 3681 +(4.86*3472)=20,554.92

16. Q: What is your estimate of the incremental cost per unit for on batch of 150,000 milk crates?

17. Incremental cost = (Direct material +Direct labout cost)+Charge due to stamping machine+ change in PFMOH = 1.91+ (5000/150000)+(20554.92/150000) = 2.080366133

18. Q: What does Exhibit2 suggest would be a “normal” price for milk crates for an “average” job shop? What does this suggest about the $3.00 price which seems to prevail at the time of the case?

19. From Exhibit2 we get Normal process at average rate= (1.91*100)/57 = 3.35

20. Q: What is the "strategically relevant" cost per unit for milk crates? (For purposes of deciding whether or not the $3.00 "market price" is profitable, on an ongoing basis.)

21. Relevant cost= DM costs+Dl costs+Charge due to stamping+Charge due to overhead attributed by labour rate =1.91+(5000/150000)+(13*3472)/150000 = 2.24424

22. Q: What is your advice to Mr. Smith regarding the milk crate opportunity? Relevant Cost = $2.24 Industry Average = $3.35 Prevailing Rate = $3.00 If use Industry pricing profit = 3.35-2.24/2.24 = 49.5% If use prevailing rate profit = 3-2.24/2.24 = 33.9% When compared to normal expected profit of 6% profit higher in both cases.

23. Thank You!!!