Relevant Costs (Graded)
Discuss Relevant Costs. Why are historical costs irrelevant?
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- It is late June, and Sandra Huchim, head of operations at Mintendo, and Bill Smith, head of salesof We “R” Toys, are about to get together to discuss production and marketing plans for the next6 months. Mintendo is the manufacturer of the popular Game Girl handheld electronic game that is sold exclusively through We “R” Toys retail stores. The second half of the year is critical toGame Girl’s success, because a majority of its sales occur during the holiday shopping period.Sandra is worried about the impact that the upcoming holiday surge in demand will have on herproduction line. Costs to subcontract assembly of the Game Girls are expected to increase, andshe has been trying to keep costs down, given that her bonus depends on the level of productioncosts.Bill is worried about competing toy stores gaining share in the handheld electronic game marketduring the Christmas buying season. He has seen many companies lose their share by failing tokeep prices in line with the performance of their products. He would like to maximize the GameGirl market share in the handheld electronic game market.Both Sandra’s and Bill’s teams produce a joint forecast of demand over the next six months, asshown in Table 9-7.We “R” Toys sells Game Girls for $50 apiece. At the end of June, the company has an inventoryof 50,000 Game Girls. Capacity of the production facility is set purely by the number of workersassembling the Game Girls. At the end of June, the company has a workforce of 300 employees,each of whom works 8 hours of regular time at $15/hour for 20 days each month. Work rulesrequire that no employee work more than 40 hours of overtime per month. The various costs areshown in Table 9-8.Sandra, concerned about controlling costs during the periods of surging demand over theholidays, proposes to Bill that the price be lowered by $5 for the month of September. Thiswould likely increase September’s demand by 50 percent due to new customers being attractedto Game Girl. In addition, 30 percent of each of the following two months of demand wouldoccur in September as forward buys. She believes strongly that this leveling of demand will helpthe company.Bill counters with the idea of offering the same promotion in November, during the heart of thebuying season. In this case, the promotion increases November’s demand by 50 percent, owingto new customers being attracted to Game Girl. Additionally, 30 percent of December’s demandwould occur in November as forward buying. Bill wants to increase revenue and sees no betterway to do this than to offer a promotion during the peak season.a. Which option delivers the maximum profit for the supply chain: Sandra’s plan, Bill’splan, or no promotion plan at all?b. How does the answer change if a discount of $10 must be given to reach the samelevel of impact that the $5 discount received?c. Suppose Sandra’s fears about increasing outsourcing costs come to fruition and thecost rises to $22/unit for subcontracting. Does this change the decision when thediscount is $5? need to be able to explain how i got the answer not necessary to show all work but this one is giving me fits.
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