ADMS 3502 Lecture Notes - Lecture 4: Variable Cost, Fixed Cost

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bluehornet266

13 Dec 2019

School

York University

Department

Administrative Studies

Course

ADMS 3502

Professor

Cristobal Sanchez- Rodriguez

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

The goal of the extended scenario is to include more strategic business decisions. The key differences from the introduction scenario are the following: New customer types all three customer types are in scope. You sell products to all three, and must set pricing policies for each accordingly. Marketing, if you recall, is by geography and to end consumers, so including the extra customers doesn"t directly affect your marketing decisions. However, the effectiveness of marketing is dependent on where consumers shop, so you should consider customer/consumer mix in your strategy. Additional production capacity new customers to serve means more inventory needed. In the extended scenario you own more machinery and equipment, and therefore have greater production capacity. You can make further investment for additional capacity. Bank loan in order to purchase more plant and equipment, you took advantage of your line of credit to fund this investment. You can extend and repay the balance on your line of credit at will.

Related Questions

1. Marketing traditionally has been divided into a set of fourinterrelated decisions known as the marketing mix, or four Ps,including all of the following EXCEPT:
A. product
B. place
C. performance
D. promotion
E. price

2. Marketers want their firms to develop efficient operationsbecause this kind of efficiency:
A. usually leads to lower prices or greater pricingflexibility.
B. allows the firm to offer greater value to customers.
C. makes it easier to get the products customers want to them whenthey want them.
D. can lead to more attractive margins.
E. All of these

3. The Ethical Decision-Making Framework includes all of thefollowing steps EXCEPT:
A. identify issues.
B. promote the firm's corporate social responsibilityefforts.
C. gather information and identify stakeholders.
D. brainstorm and evaluate alternatives.
E. choose a course of action.

4. The centerpiece of the Marketing Environment Analysis Frameworkis:
A. green marketing.
B. corporate partners.
C. culture.
D. competitive intelligence.
E. consumers.

5. Most "big box" retailers regularly move products from one aisleto another. They also put personal care products in the pharmacyarea, many aisles away from the grocery products. They do thisbecause consumers who spend more time walking through the store arelikely to make:
A. impulse purchases.
B. limited problem solving decisions.
C. extended problem solving decisions.
D. ritual consumption purchases.
E. affective alternative decisions.

6. Edward, the leading salesperson for Harry's Honda dealership,began hearing customers asking for hybrid automobiles several yearsago. Edward alerted Harry, and Harry pre-ordered many Honda hybridsbefore they became available. In this case, the source of needrecognition was:
A. trade show demonstrations.
B. ads in trade journals.
C. customers.
D. the Internet.
E. suppliers.

7. One of the reasons marketers use loyalty segmentation is:
A. the high cost of finding new customers.
B. government tax incentives for loyalty.
C. accounting difficulties associated with identifying newcustomers.
D. rapid population increases.
E. the failure of micromarketing as a workable strategy.

8. Matt was passionate about Abercrombie & Fitch. It was theonly place he'd buy his clothes. If anyone asked him about clothes,he would talk for what seemed like hours about why he only shoppedthere. From a strictly marketing perspective, this word of mouth ispart of:
A. social insistence.
B. brand loyalty.
C. self-actualization.
D. motivation.
E. brand extension.

9. When Procter & Gamble added teeth whitening products underthe Crest brand, the firm was engaged in:
A. corporate branding.
B. brand extension.
C. brand licensing.
D. brand association.
E. perceived value branding.

10. By the time BMW and Mercedes Benz entered the mini-SUV market,there were many competitors, sales had peaked, and profits weredeclining. These firms entered the market during the ______________stage of the product life cycle.
A. introduction
B. leveling
C. maturity
D. growth
E. decline

11. By providing good customer service, firms __________ theirproducts or services.
A. eliminate the communication gap for
B. add value to
C. reduce the zone of tolerance for
D. reduce the empowerment cost associated with
E. increase the perishability of

12. Collecting information at the point of sale is astraightforward and inexpensive way to assess service quality, butthis approach will NOT be useful if:
A. customers cannot assess service quality, as in the case of oilchange or maintenance check.
B. decision-making managers do not get the results of thefeedback.
C. the person who rendered poor service is the same personcollecting the information.
D. customers are rushed and don't take the time to assess theservice.
E. All of these.

13. Ryan gave the manager of his convenience store a set ofbinoculars so she could see the gasoline prices charged by theother convenience store at that intersection. Ryan told the managerto always match the gasoline prices of the other store. Ryan isusing a _____________________ pricing strategy.
A. maximizing profits
B. target profit
C. target return
D. status quo
E. sales

14. At the break-even point:
A. costs are zero.
B. price is maximized.
C. profits are zero.
D. fixed costs are zero.
E. contribution per unit is zero.

15. For marketers to advertise a price as their ______________, theBetter Business Bureau recommends that at least 50 percent of thesales of a product occur at that price.
A. fixed price
B. zone price
C. regular price
D. leader price
E. cost-based price

16. Brenda is working on an automated re-ordering system which willelectronically re-order inventory for her shoe store as purchasesare made. Brenda is working on a supply chain management systemthat will:
A. provide products at the right time.
B. provide products at the right locations.
C. provide the right quantities.
D. minimize system-wide costs.
E. all of these.

17. A manufacturer of high-end products might consider sellingproducts in a warehouse club if:
A. there are no high-end shopping centers within a 100-mile radiusof the warehouse club.
B. the warehouse club has a good reputation.
C. the manufacturer is trying to increase market share.
D. the manufacturer overestimated demand or has a great deal ofreturned merchandise from other retailers.
E. the warehouse club wants to upgrade its image.

18. Because of the way _______________ buy merchandise, customerscan never be confident that the same merchandise will be in stockeach time they visit the store.
A. department stores
B. off-price retailers
C. discount stores
D. downstream value stores
E. category specialist stores

19. The basic goal of integrated marketing communications isto:
A. communicate the value proposition to the target market.
B. create desire.
C. manipulate consumers.
D. outspend competitors.
E. tell the world about your company.

20. The sender of an integrated marketing communication:
A. must work with the advertising specialists to ensure allrecipients interpret the message accurately.
B. can assess the manner in which receivers interpret the messagethrough gross rating points.
C. has little control over what meaning any individual receiverwill take from the message.
D. controls the meaning all receivers take from the message.
E. generally uses a rule-of-thumb interpretation index.

21. In the AIDA model:
A. advertising leads to interest, which hopefully leads to desireand then, action.
B. awareness leads to integration, which hopefully leads to desireand then, action.
C. awareness leads to interest, which hopefully leads to desire andthen, action.
D. awareness leads to interest, which hopefully leads to desire andthen, attention.
E. awareness leads to interest, which hopefully leads todetermination and then, action.

22. When Microsoft introduces a new version of its Windowsoperating system, it typically uses selected magazine, Internet,and direct mail advertising. This combination of advertisingoutlets represents Microsoft's:
A. niche buy.
B. advertising plan.
C. media mix.
D. track testing.
E. supply chain messaging.

23. _____________ advertising has the advantages of being highlytargeted and offering opportunities for personalization.
A. Television
B. Radio
C. Direct mail
D. Outdoor
E. Newspaper

24. In the United States, the regulation of advertising involves acomplex mix of laws and informal restrictions designed to:
A. protect consumers from deceptive practices.
B. stimulate domestic demand.
C. reduce international competition.
D. promote social marketing.
E. institutionalize pull strategies.

25. _________________ is a sales philosophy and process thatemphasizes a commitment to maintaining and investing in long-term,mutually beneficial business relationships.
A. Organizational buying
B. Cold calling
C. Psychographic selling
D. Relationship selling
E. Sales management

blushdolphin201

Your Home Is a Good Place, Inc.

INTRODUCTION: In 2006, Bill Norwalk, a 50-something entrepreneur with a decidedly independent streak, was at the cusp of a major change in his business. Norwalk's background in marketing started with a bachelor's degree in business and a marketing major. He had taken his marketing training to heart and developed a novel way of satisfying homeowner customer needs, one which had the potential to launch a new industry. Like many entrepreneurs with a good idea, Norwalk was confronting the issues of implementation and the attainment of critical mass. Should the business expand and attract new customers as well as contractors, suppliers, and other facilitators and how? How could the business increase the number of affiliates and draw from an appropriate customer base? Norwalk concluded that the best thing to do when you do not know that to do is get outside help. He decided to hire a consultant to prepare a situational analysis (SWOT) and a marketing plan for the business. BACKGROUND: Bill Norwalk grew up in Ohio, one of three children in a middle class family. He spent his formative years playing ball, going to Scouts, and being a member of his local church. Norwalk went to college at Miami University, where he got a bachelor's degree in business. After graduation he worked construction and eventually started his own business as a DJ at bars and at wedding receptions. All through his life he displayed an independent streak, doing things his way. When he was 40, his customers and friends convinced him to start installing music systems as a sideline. His experience and taste in matching sound equipment made him the perfect entrepreneur, some-one who knew what he wanted and was sufficiently risk-prone to be willing to work for it. In 2006, Norwalk was tired of working for someone else and searched for a way to use his entrepreneurial talents. He realized that his success would necessitate doing business his way. Your Home Is a Good Place, Inc., was a novel channel intermediary that employed convenience as a strategic marketing variable. It differed from traditional home improvement by providing the well-to-do homeowner with a one-stop shopping experience. Gone was the need to search out an architect or design firm and get plans. Gone was the need to then locate one or more independent contractors and put up with their continual mess while the constructive destruction processes took place. Instead, people with incomes of $100,000 or more came to the suite of showrooms at YHGP. There, on the model site, end-users could glimpse a vision of how their homes could be transformed into a luxurious playground. Home improvement is all about making one's personal environment more comfortable and at the upper levels of consumption, making it uniquely different from what the neighbors own. As such, it includes much more than basic bathroom, bedroom and/or kitchen de-sign. Unfortunately, consumers do not have the time or, in the majority of cases, the talent to visualize the elements that would make their place both tasteful and unique. Customers could walk the site visiting showroom kitchens, living rooms, bedrooms, game rooms, libraries, entertainment home theaters, pool areas, and even home putting greens for the avid golfer. If you could dream it, Norwalk could get it built. If you could not, Norwalk could locate people to dream it up for you. For example, there was an indoor driving range simulator and an outdoor putting green for the golf enthusiast. In the bath area, there were complete luxury bath spaces. No more visits to the lumber yard or home store to examine a bathtub in one place, sink in another and shower in another space with the faucets in yet another. The consumer could see the complete package with wall treatments and lighting, and Norwalk could put clients together with all the people needed to accomplish their dreams. Luxury bedrooms, kitchens and home theaters were also provided for viewing. At YHGP the consumer could literally see how different wall or floor finishes and construction techniques came together to produce an extremely unique and satisfying life-improving living space, hence the name Your Home Is a Good Place, Inc. The ease of selection was just the beginning. Once a design concept was born in the consumer's 'mind YHGP personnel would take charge of the details of preparing the construction plans obtaining and contracting with construction contractors, dealing with financing agencies' obtaining building permits, and finalizing the contracts. YHGP would arrange for coordination between the various participants and see that the contractors minimized the me'' they created and that they cleaned up their work spaces before they left at the end of the day, so that there would be no more mess for the homeowner. YHGP differed in concept from typical home store/hardware store or design center. These businesses exist as a ready-made industry in place to cater to the do-it-yourself (DIY) consumers in terms of providing the tools and components. However, most DIY projects tend to be relatively small and are undertaken by people whose primary objects is to save money. Norwalk realized that his niche was elsewhere. Consumers who have large amounts of disposable income and who want to undertake a major redesign of their space have to overcome these problems: (1) design and architectural changes including permits and safety inspections; (2) sourcing of appliances and components for the Projects, e.g., faucets for baths and speakers for home theaters; (3) provision of professional contracting labor; (4) financing for the project; and (5) dealing with the uncertainty during construction. Customers could see the central theme of the YHGP concept at a pavilion located in central Michiana on a leased site. Berrien and Cass counties in Michigan as well as Elkhart, La Porte, Marshall, St. Joseph and Starke in Indiana made up the market area. Local organizations and their statistical reporting recognized a larger 15-county area Michiana area, though Norwalk felt it was too large to serve effectively and efficiently. YHGP differed from traditional businesses because it required little of the entrepreneurâs cash up front. Norwalk convinced local contractors, landscapers, designers, architects, appliance suppliers and others to donate their work or products to develop a series of show-case rooms on the leased site. Each model environment was chock-full of design ideas to spur the creative juices 01 potential clients.

THE SUPPLY SIDE: In return for donations of labor and material, the contractors and other facilitators (including local advertising outlets, which provided the publicity/advertising) got to show-case their wares in the "whole enchilada" pavilion. The supply-side participants got a ready source of potential clients, access through YHGP-coordinated job scheduling and help with obtaining building permits and inspections. Some of the suppliers of labor and contracting as well as components included painters and wallpaper hangers, rough-in carpenters, finish carpenters and cabinet makers, masons, electrical contractors, plumbers, landscapers, faux finishers, sound design engineers, roofing contractors, welders and other certified tradespeople. Additional players were land surveyors, movers, HVAC contractors, insulation contractors, and solar/wind/alternative energy designers and installers. Not everyone who provided home remodeling services in the Michiana area was allied with Norwalk. A significant number were direct competitors, though they did not have the advantages provided by YHGP. THE DEMAND SIDE: YHGP was located in the town of Mishawaka, Indiana, in the middle of the Michiana area. While not officially recognized by the U.S. government (thus no official metropolitan statistics), the Michiana area had two associations of area government agencies. MACOG, the Michiana Area Council of Governments, representing four of the seven counties, was located in Indiana. The Southwest Michigan Planning Commission, SWMPC, represented the remaining three counties in Michigan (http://swmpc.org and www.macog.com). U.S. census data is available for the seven counties in Michiana (2000 and 2006 data were combined) (see Exhibit 1). Cass, Marshall and Starke (Michigan) and Elkhart, La Porte, St. Joseph and Berrien counties (Indiana) had approximately 856,000 residents. The median household income in Michiana's counties varied over a range of $37,000 to $57,000. The entrepreneur's vision for YHGP was to serve only di private dual customers whose household income exceeded $100,000 and whose project cost averaged $10,000. Norwalk felt that anyone who had an income below this level would be most likely to use the DIY process to serve their needs. Norwalk had not considered other options for customers. Although Norwalk considered any private individual with an income above $100,000 as a potential consumer of his services, there were limits on even this. For example, renters and people living in new homes were less likely to purchase upgrades than were others. Additionally, Norwalk wondered if age or other demographic factors might have an impact on those who might purchase. THE INTERSECTION OF SUPPLY AND DEMAND:Norwalk's concept went beyond the idea of a general contractor who subcontracted out portions of a job. YHGP coordinated projects from start to finish. In the beginning, when a customer was considering an environmental improvement, Norwalk showed them what could be done. YHGP arranged for complete plans to be drawn up, for the permits for construction, and for the financing. During construction, Norwalk worked with the contractors to see that proper building site "etiquette" was maintained. That meant that each day's mess was contained to the ex-tent possible, with the work stopped and the debris cleaned up before the crews quit for the day. Homeowners had a less stressful experience because of this. As such, customers were more likely to pay the bills which were submitted by Norwalk on time. YHGP's billing schedule billed for work on a percentage of work completed. This improved Norwalk's and the contractors' cash flows. Norwalk had six employees on staff. Norwalk was worried that he did not have the right mix of employees. Some skills were needed that his employees did not have and some dysfunctional behavior was present. For example, the chief of operations, David, was the business manager who made things happen, but stifled initiative in the process. Rory served as project manager in charge of scheduling and service calls. He was a compliant type who wanted everyone to be happy, but could not discipline workers. David had to step in when work was not progressing. Priscilla did sales and estimating. She was aggressive and probably was that way from a background in radio station sales management. Sam also did d sales and was very good at taring clients. Even though he was a self-starter, he could not initiate a sale with a new client. Rowdy was an installer and gopher (as in "Go for coffee!â) who did what was needed, but exhibited no initiative. The bookkeeper, Johanna, was a classic pencil pusher. She would start at the top of a stack of paper and work down in order, item until the work was done.

THOUGHTS: Because YHGP had few employees and relied instead on partnerships with independent contractors, expansion, in Norwalk's opinion, was as easy as bringing on a firm that wasn't currently employed by YHGP. Additionally, in harder times, Norwalk would not have to fur-lough employees. Norwalk felt that his primary contacts in the customer market were women. Women wanted a complete packaged solution rather than a piecemeal approach. Some could come to the firm after viewing one of the TV home remodeling shows and want to duplicate those concepts. Since YHGP was new, it had yet to develop a well-known image in consumers, Often a new concept is slow to catch fire with consumers. Norwalk was worried about building a brand identity in Michiana. YHGP got paid a flat percentage of the bill, typically 10 percent. Since Norwalk, arranged all of the details with both buyer and supplier, and tied everything up in staff package, consumers were not aware of the facilitating charge. The various sub contra neat negotiated with Norwalk or his staff beforehand, and because they were guaranteed their cut when the contract was signed, they did not object to the fee either. At this point, Norwalk could personally oversee all contracts. However, he worried that at some point in the future, he would need one or more project supervisors to maintain quality. Norwalk felt that if he could gain five customers a month at a minimum total bill of $10,000 each YHGP Would be successful.

CURRENT MARKETING ENDEAVORS: One element of Norwalk's plan was demonstrated in his promotional endeavors. Large home improvement purchases are often facilitated by the availability of credit and almost never occur without some form of promotion. He worked with banks and credit unions, realtors, radio stations and regional automobile dealers to develop promotions that used these facilitators' money and resources to attract business for the supply-side participants. For example, he would put together a deal with a local car dealer, a bank and a radio station. The bank would offer financing, the car dealer a one-year lease on a new car and the radio station would promote a package where a Your Home Is a Good Place, Inc., client could receive the whole package as an incentive. Each business participant got the enhanced promotional effects and Norwalk's business got a cut of the overall price of the development package up front for no cash outlay. These monies were used to pay YHGP staffers and for daily operations. Other promotional events revolved around social meetings of regional groups of professionals like doctors. A catered dinner would be provided (at the caterer's expense in ex-change for the publicity and an introduction to the group) at the YHGP showrooms. Before and after the dinner, the invited guests would have access to architects, bankers and other professionals who might be involved in the transactions, and to the model showrooms demonstrating possible changes to their living spaces. The networking opportunities pro-vided convenience for all parties and usually resulted in new contracts. YHGP got no direct income from these events.

After reading the case study, answer the following question: Who are they? Where did they come from? What industry? What is their position in the market? 4 P's (Discuss the product, place, promotion and price) Environmental Forces (Discuss how each affects the company) Customers and Target Market (Who do they serve?) Current Situation â SWOT, Competition, Market Share, Stock prices. Etc. What is the problem? Alternatives âpossible strategic solutions Recommendation

KRAYDENâS CYCLE COMPONENTS INTRODUCTION: COMPANY, PRODUCT, AND SUPPLY CHAIN

Kraydenâs Cycle Components (KCC) is a high-end specialty fabricator that manufactures one product with many variants. The basic product is known as a rolling chassis, a key component used in manufacturing motorcycles. While there are variations across the industry, a rolling chassis typically consists of a motorcycle frame, front forks, wheels and tires, and handlebars.1

KCC is a first-tier supplier to an original equipment manufacturer (OEM) that produces motorcycles in three versions: Sport, Cruising, and Retro. The OEM purchases KCC product and attaches its well-known proprietary engine and gearbox, wiring and gauges, seat, fenders, various components, and gas tank with iconic emblem. The OEM is KCCâs sole customer as it essentially requires KCCâs full capacity.

KCC manufactures each frame from steel tubing but purchases a variety of parts from suppliers. Workers at KCC attach these parts to the frame to complete the rolling chassis. Figure 1 illustrates the supply chain. The suppliers of wheels, front forks, and handlebars are second-tier suppliers. These vendors provide parts that are ready to be attached to the frame. The tire vendor is considered a third-tier supplier. The company that builds the wheels acquires tires (that meet contract specifications directly negotiated by the OEM) and provides a complete wheel assembly ready to be attached to the front fork and rear frame.

KCC has had numerous problems with delivery and quality over the past several years. Because the problems have been so acute, the company has employed four different plant managers in the last five years. Management acknowledges the supply chain has difficulties; unfortunately, there is virtually no room for error in meeting delivery schedules and product quality targets. Further, KCC has been under increased scrutiny from its stockholders because earnings have deteriorated over the past three years. See Tables 1-4 for KCCâs financial information (income statement, balance sheet, statement of cash flows, and unit cost information).

The economic recession that ended around the summer of 2009 has enabled the OEM to expand production and sales. The companyâs sales have increased by 1,000 units per year since 2010. By 2015, KCC was delivering 30,000 units to the OEM; management believes this level of output represents capacity. Thus, production above 30,000 units is not possible without staff overtime or an investment in additional plant resources that will increase hourly throughput. Management at KCC has received notice that the OEM plans to increase production by 3,750 units next year (12.5%) and to demand price concessions of $200 per unit as specified in the contract.

THE PRODUCT MIX AND OUTSOURCED PARTS

The OEM produces motorcycles for three different market niches; therefore, KCC produces three distinctly different frame geometries as follows.

Sport bikes emphasize speed and agility. Customers expect rapid acceleration and responsive handling.

Cruising bikes emphasize power and comfort. They allow riders to enjoy long-distance touring.

Retro bikes appeal to customers who appreciate classic designs. They are typically smaller than cruising bikes and more stable than sport bikes.

For each frame geometry, the OEM offers three possible handlebar types. Because riders are various sizes, handlebars can be configured in a variety of heights, widths, and lengths (straight bars or bars pulled back toward the rider).

The OEM offers three different wheel set possibilities. Wheel sets consist of one front wheel and one rear wheel. The different wheel designs are:

Chrome spokes.

Cast aluminum polished (silver) alloy wheels.

Cast aluminum anodized (black) alloy wheels.

The OEM offers four unique tire choices for each frame type. Thus, KCC could purchase as many as 12 different tire models to meet market demand (three frame types x four different tires per frame). Factors that differentiate the tires include:

Bias-ply (characterized by a round profile and tall sidewalls).

Radial (characterized by a flat profile and short sidewalls).

Grip (softâbetter road grip but shorter tread life; hardâpoorer road grip, but longer tread life).

Tread design (differences in the number of grooves in the tire pattern).

Number of layers (known as plies) from which the tire is constructed; using more layers results in a stiffer tire.

The OEM contracts directly with the tire manufacturer to supply specific tires to the wheel manufacturer. Much engineering effort has gone into identifying the proper tires and wheels for each type of motorcycle. The wheel vendor receives and mounts the appropriate tire on the wheel set and then delivers the set to KCC. The tire manufacturer sells its products to different OEMs, as well as to aftermarket customers.

Recently, the OEM has complained to KCC about chassis that vibrate and exhibit poor handling qualities when the completed motorcycle is test driven. Engineers at KCC have traced the source of the problem to the tire manufacturer. A wheel/tire combination that is not balanced properly causes vibration and is a control and safety issue. The solution requires placing the wheel/tire set on a machine to determine the location of the imperfection causing the imbalance. A small weight is attached to the wheel to offset the tire imperfection and to remove the vibration. Because of pressure from the OEM to deliver a quality chassis, KCC purchased a wheel balancing machine and tested each set before installing it on their chassis. The quality delivered to the OEM has improved, but management at KCC is unhappy because the OEM refuses to increase the contract price to help offset KCCâs additional cost of equipment and labor.

The supply chain has additional complications. One of KCCâs suppliers (a second-tier supplier that produces handlebars) is also a subsidiary of the holding company that owns KCC. This supplier has contracts with manufacturers of bicycles, scooters, and power chairs. On several occasions, this supplier has missed scheduled deliveries. When confronted, management explained they had external customers whose orders must be filled. At certain times of the year, demand exceeds the supplierâs ability to meet it. As a result, KCC management has scrambled to find suitable suppliers (at much greater cost) in order to meet their own delivery schedules.

PROCESS DESCRIPTION

KCC receives an order from the OEM exactly three hours before the specific chassis is needed on the OEMâs assembly line. The company employs four production line workers who are cross-trained to perform multiple functions.

Figure 2 illustrates the manufacturing process for KCC, a manufacturing cell that includes the following processes:

Step 1. Tube cutting and assembly. Steel tubes arrive by forklift at Step 1, the cutting and welding process.

Cutting. Using a computer numerically controlled (CNC) machine, steel tubes are bent and cut to proper angles and lengths that match the engineering design specifications for each frame typeâSport, Cruising, or Retro.

Welding. After the tubes are cut, they are clamped to a jig that holds them stationary at the proper angle for welding. A robot tack-welds each joint, which is a temporary weld to hold the assembly in preparation for final welding. Once the frame is completely assembled by tack welds, the robot permanently welds the joints.

Step 2. Weld cleanup and preparation. The welded metal frame advances to the next process where the welds are smoothed and polished, then to a cleaning bath where the frame is cleansed of oils and surface contamination prior to the powder coating process.

Step 3. Powder coating. KCC powder coats, rather than paints, the frames. Consistent with environmental sustainability issues, the powder coating process emits almost zero volatile organic compounds (VOCs). In addition, any overspray can be captured and reused. Powder coating is a dry powder that does not require a solvent. The powder coating is robotically sprayed within a booth by a nozzle that imparts a negative electrical charge to the powder. The powder electrostatically adheres to the grounded frame. The frame is heated to approximately 400 degrees Fahrenheit for around three minutes to melt the powder that flows to produce a smooth, strong, glossy finish.

Step 4. Fork assembly. The forks are manually attached to the frame.

Step 5. Tire balancing. The wheel/tire set is tested for balance, and any necessary modifications are made.

Step 6. Wheel/tire assembly. The wheel/tire assembly is manually attached to the frame.

Step 7. Handlebar mounting. The handlebars are mounted on the frame.

Step 8. Loading the frames. The frames are carefully loaded into a cargo trailer for transport.

KCCâS JUST-IN-TIME/ JUST-IN-SEQUENCE INVENTORY SYSTEM

The OEM produces motorcycles for eight hours each weekday. KCC makes eight deliveries (once per hour) during this period. The frames are delivered just-in-time (JIT) and just-in-sequence (JIS). JIS delivery implies the first frame unloaded from the truck is the next frame needed for production by the OEM. KCC is linked to the OEMâs production information system via an electronic data interchange system. The system identifies the appropriate frame geometry, handlebar type, wheel type, and tire specifications for each order.

Management at KCC has been working to improve operating efficiency and profitability. Because KCC operates according to Lean principles, the company strives to hold minimal parts inventory. Thus, on-time delivery and the quality of purchased parts are crucial to keep production lines operating at desired output levels. If KCC causes the OEM to stop its line because of delivery or quality problems, the contract allows the OEM to bill KCC for lost production time at a rate of $2,000 per minute.2 The OEM believes this clause is justified because it loses contribution margin if production is brought to a halt. In some cases, KCC has passed these costs along to second-tier suppliers that caused KCC to miss a delivery.

KCC has met on several occasions with its suppliers to try to resolve supply issues. Vendors have been frustrated by the Lean system demanded by KCC. To reduce their exposure to line stoppage costs, some second-tier suppliers have responded by increasing inventory levels. Additionally, some suppliers have purchased redundant manufacturing equipment on key production processes that can be used if the primary equipment fails, further adding to manufacturing costs.

Management at the OEM believes in developing long-term strategic partnerships with its suppliers. Thus, each supplier is rewarded with a multiyear contract. The OEM prefers to use a single supplier for each component, rather than to contract with two (or more) different companies for a component. KCC has the exclusive contract to produce rolling chassis for the OEM, and has recently been awarded the next contract covering five years of production. As a result, KCC made significant investments in retooling and plant modernization during the current year. Unfortunately, the investments did not increase KCCâs capacity sufficiently to meet expected demand.

THE MANAGEMENT DILEMMA

KCCâs management operates as one participant in a complex supply chain. They are managing relationships involving multitier suppliers and a demanding delivery schedule. Further, stockholders are expressing concern over KCCâs declining profitability in recent years. Management has not developed a plan for addressing the increase in production required by the OEM, nor have they developed an understanding of the financial consequences of accepting the new contract.

Question:

The OEM produces its final product in three versions with many variants. How many unique product combinations are possible? Explain. What are some examples of complexity (and related costs) that result from offering three product versions with many variants? What challenges does this complexity present for management accountants?

ADMS 3502 Lecture Notes - Lecture 4: Variable Cost, Fixed Cost

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