StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Case Study: Rich Manufacturing - Essay Example

Cite this document
Summary
Both companies have agreed upon purchase terms: Rich will purchase a minimum of 50,000 parts from Bhagat, the price for one unit of machine part will be Bhagat’s production costs and a…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.6% of users find it useful
Case Study: Rich Manufacturing
Read Text Preview

Extract of sample "Case Study: Rich Manufacturing"

Background Bhagat Incorporated has been the supplier of machine parts of Rich Manufacturing Company. Both companies have agreed upon purchase terms: Rich will purchase a minimum of 50,000 parts from Bhagat, the price for one unit of machine part will be Bhagat’s production costs and a cost-plus markup of $5. But due to internal conflicts, that is, the labor union negotiations, production costs of Bhagat increases by $3, which is a result of increase in labor costs due to these negotiations. Rich Manufacturing Company then faces the problem of higher price of machine parts, that being one component of its costs for its product.

Because of this increase, its profitability can be affected.1. Why do many firms use cost-plus pricing for supply contracts?There are two primary reasons why firms use cost-plus pricing in their supply contracts: one, the market price of the product by the supplying firm, as input to a company’s production is hard to determine and reliance on differences in market prices will result in abrupt changes in the customer-firm’s cost structure; two, because the parts from a supplier is an input to the final output the firm is going to produce, the production is similar when the firm produces the parts on its own, only that it has to pay for a markup as part of the profit of the supplying firm.

A company contracts a supplying firm in order to produce an input it can otherwise make, but chooses not to in order to achieve efficiency and rid itself of capital considerations for producing it. By having the supplying firm produce an input to its final output, the company aims similar cost structure from its supplying firm as when it produces the input on its own, or better cost structure when it can save. Therefore, the company chooses to base the price on the production costs of supplier, plus a certain markup as payment for the services it will render.

In this way, the firm can still maintain the cost-structure as when it produces the input on its own but just paying a certain markup, which will enable it to gauge its return on investment on the decision.2. What potential problems do you envision with cost-plus pricing? The cost-plus pricing in this situation seems to assume that Bhagat’s production costs will remain the same from the time the contract has been agreed upon up to a certain time. The cost-plus pricing in this situation does not incorporate the changes that may incur in the production of Bhagat, which will in turn increase its production costs, thus increase the price of the machine parts.

The problem with this cost-plus pricing is that Rich Manufacturing Company does not have control over the costs of Bhagat’s production. Any increase in Bhagat’s production costs will be reflected in the price Rich Manufacturing Company in this scenario. The problem with this approach is that if any inefficiency in Bhagat’s production sets in, the increase in production costs will be absorbed by Rich Manufacturing Company. This will in turn hurt its profitability if the costs (price of machine parts) turn out to be higher that when the cost has been agreed upon.3. Should Gina contest the price increase? Explain. Gina may raise this issue with Bhagat, but if it is stipulated in the contract that the price Rich Manufacturing Company has to pay to Bhagat is dependent upon the production costs, plus a certain markup, it will be as agreed upon.

Rich Manufacturing Company assumes that no changes will be made in the production cost structure of Bhagat that is probably why it agrees to sign it. But if it is stipulated in the contract that the production costs Bhagat will use in order to price its product, plus a markup is the cost that it has currently been using during the time of the signing of the contract, then Gina has a legal claim. It may raise the issue, but in these kinds of situation, Rich Manufacturing Company does not have any control over the cost structure of Bhagat, which leads to difficult production consideration on Gina’s parts.

This sort of cost-plus pricing approach can better be utilized when the other company has control over the cost structure of the supplying company in order to protect its own profitability.4. Is the increase more likely to be justified in the short run or the long run? Explain. The increase in the price is likely justified in the long-run, when Rich Manufacturing Company is able to make certain changes in its own cost structure and selling decisions, in such a way that it can accept the increase without hurting its own profits.

In the short-run, depending on the cost structure of Rich Manufacturing Company, it may even incur losses because of the abrupt increase in the prices of machine parts. While Rich Manufacturing Company may adjust the price of its own products in the long-run in the market, it may not be able to do it in the short-run. Increasing the price of its products in the short-run in order to absorb the abrupt increase in costs of the machine parts, may offend Rich Manufacturing Company’s customers, which can result in sales losses.5. How will a $3 increase in the price of machine parts affect Ginas own production decisions?

The $3 increase in the price of machine parts, if it orders 50,000 units up to 100,000 units from Bhagat, will result in an increase in $150,000 to $300,000 in cost outlays. This increase can make Gina think of either producing the input on its own rather than contracting an outside supplier, Bhagat to produce it for Rich Manufacturing Company.This is the so-called make-or-buy decisions within companies. A company chooses to get a supplier only when buying exceeds the benefits of making an input on its own.

In this case, if Rich Manufacturing Company can manufacture the inputs on its own and incur fewer costs than when it gets Bhagat as supplier to produce it, Gina may choose it for its production considerations. The control on costs will also be beneficial to Rich Manufacturing Company as compared to no control over Bhagat which may have abrupt production costs, which in turn hurts the profits of Rich Manufacturing.Proposed Solution:If Gina still wishes to continue using cost-plus pricing in its supply contracts, it should be careful as to the agreement she will draft with the other company in order to control the costs of producing the machine parts Rich Manufacturing Company will buy.

Either she stipulates in the agreement that the current level of production costs will be used for cost-plus pricing, and no subsequent changes in the production cost structure of the supplying firm will be reflected in the price Rich Manufacturing Company will have to pay. Gina will then have a safety net and legal claim in order to control the production costs. If it can control the costs of producing the machine parts, it will definitely hurt the profitability of its own company because of the abrupt changes in the other firm’s production cost structures, such as the labor cost increase due to union negotiation.

That way, Gina can still control the costs in relation to Rich Manufacturing Company’s own cost structure.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Case Study: Rich Manufacturing Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Case Study: Rich Manufacturing Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/miscellaneous/1548146-case-study-rich-manufacturing
(Case Study: Rich Manufacturing Essay Example | Topics and Well Written Essays - 500 Words)
Case Study: Rich Manufacturing Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/miscellaneous/1548146-case-study-rich-manufacturing.
“Case Study: Rich Manufacturing Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1548146-case-study-rich-manufacturing.
  • Cited: 0 times

CHECK THESE SAMPLES OF Case Study: Rich Manufacturing

Case Study: Volvo Corporation

Volvo Car Corporation: Case Study Volvo Car Corporation: Case Study Information Technology plays a major role in today's business environment where car manufacturing industry is not an exception.... hellip; Unlike the past, safety concerns have become the main marketing tool in today's car manufacturing industry.... In such circumstances, Volvo takes immediate actions to address the issue by adjusting its manufacturing processes or demanding its suppliers for making improvements....
3 Pages (750 words) Case Study

How Structural Adjustment Programs Impacts Women in the Philippines

This case study "How Structural Adjustment Programs Impacts Women in the Philippines" proves that studies show that the structural adjustment policies (SAPs) undertaken by international financial institutions for indebted countries have actually created hardships in many countries.... hellip; As a result, Alicia and Diana were forced to work as maids and forever resigned to the bondage of poverty....
9 Pages (2250 words) Case Study

Applying the Case to Real Life Practice

“The Association between Activity Based Costing and manufacturing Performance.... The rich information provided by the review of literature in the study further confirmed the advantages that managers acquire in terms of costs association by implementing ABC.... One particular example is the case study done by Ittner, Lannen & Lackner (2001), wherein findings and results could be applied in business in real… In real life, research results could be applied because of situational similarities....
1 Pages (250 words) Case Study

Emerging Market Economy in Costa Rica

nbsp; Costa Rica is rich in plants and animals an aspect that has resulted to the improved tourism sector that has generated a significant amount of foreign exchange.... This paper 'Emerging Market Economy in Costa Rica" focuses on the fact that Costa Rica is a country that is located in Central America....
10 Pages (2500 words) Case Study

Gulf Creative Ideas

As a result, a number of large-scale furniture manufacturing companies have cropped up in all corners of the country.... Under the organization chart, inventory management is part of these activities in the manufacturing process.... Abdullah Al-kuary is the company's sole proprietor....
5 Pages (1250 words) Case Study

The Development and Presentation of Hewlett Packard

The advertorial published by one of the largest technology products manufacturing and selling companies, known as Hewlett Packard is chosen for the critical discourse analysis.... The kjet printers of Hewlett Packard are renowned for their vibrant and rich printouts which makes Hewlett Packard a leader in the market of different models of printers....
12 Pages (3000 words) Case Study

Case Study: Whistler Corporation"

The management of Whistler Corporation trying to evaluate how to attain cost… In this case, the options that are available include restructuring of the manufacturing process such as material handling, factory lay-out, inspections and packaging through implementation of just-in-time Case study Whistler Corporation was founded in 1970s and initially designed and manufactured electronic specialty productssuch as marine radars, voice scramblers and gas leak detectors in Westford, Massachusetts....
2 Pages (500 words) Case Study

General Motors

eneral Motors (GM) is one of the world's largest companies, with manufacturing operations in over 30 countries and product sales of nine million units in more than 200 nations over the world.... In spite of its rich history of rising from humble beginnings in 1908 to its apex of controlling 65% of domestic car sales in the mid-1970s, GM today is one of the least profitable vehicle manufacturers in the world....
8 Pages (2000 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us