Electro Inc

Case Name:                Electro Inc.

Student Name:                Hamza Khalid

Student Number:        100283803

Short Cycle Process:        

• Role: Executive Assistant for the Board of Directors
• Date: December 31, 1986
• Location: Calgary, Canada

ISSUE 1:

There is concern with regards to the some of the board members belief that the Electro Inc’s financial difficulties have come from the Mercury project. The Mercury which is a microcomputer equipped to be compatible personal computers and other electronic devices offered by Electro Inc. With an attempt to enter the automation market quickly with its innovative technology, issues such as underachievement in expected sales forecast for the year 1986. In addition, Electro Inc. had to incur additional product cost due to malfunction totalling 2 million dollars. As a result, Electro Inc is looking for the best way to produce Mercury products to provide be efficient and effective of resources while maximizing total contribution margin for the current year.

Management Accounting/ Business Concepts: Contribution Margin & Product Mix

ANALYSIS 1:

Based on the target scenario and the 5000 units expected sales forecast, the current situation presents a contribution margin of $1594 & $868 per unit of Mercury at Montreal & Toronto respectively (Exhibit 1). The total contribution after deducting fixed overhead to net income amounts to $3,316,000 which can be retained for future investment. Given the 120,000 Equivalent Work Units constraint of 120,000 EWU, management has the option of producing 2000 & 3000 units at Montreal & Toronto. This will result in a total contribution margin of $4,042,000 representing a 21% increase in net income. Lastly, another option Electro has is using all its EWU capacity by solely producing Mercury at Montreal. This will only result in 4000 units produced which can be sold to consumers. under this alternative, the total contribution after deductions amounts to $4,976,000 of net income representing a 50% increase in net income from the Target scenario (Please refer to Exhibit 1).

Mercury is a new innovative product and an excellent addition to the existing PBX products since the Electro products are all compatible with one another. Electro Inc aims to gain competitive advantage through innovation and customer service. Because of the determination, they have pushed the company to unexpected levels and have ran into some financial problems due to underachievement of sales and profitability. Careful consideration needs to be spent in inspection & testing products to prevent additional costs associated with malfunctioning products as this puts an organization brand & credibility at risk.

RECOMMENDATION 1:

Based on the product/cost analysis, it is recommended that Mercury be produced specifically at the Montreal location so that total contribution can be maximized to $6,376,000. After deducting fixed overhead total income will result in $4,976,000 representing a 50% increase from the proposed location. Electro Inc. can benefit greatly from this implementation because it simply generates the best return for the resources used. Clearly, the cost of EWU per Mercury in Toronto is $726 more which can be saved by sticking with only production in Montreal. This will also allow for less variation in products since the same facility will be creating the products as opposed to the current method. Quality will inevitably increase due to a more focused approach allowing task handlers to operate at optimal level of efficiency while emphasising more time towards inspection and testing and covering development costs.

ISSUE 2:

Electro has already begun the development of major Series A project with the aims to develop an innovative communication product of advanced technology for an underdeveloped market with lots of promise due to minimal competition presently. Electro Inc is known for medium-low level communication product market but now is taking a big step forward and expanding to the high-level communication product. The passion and entrepreneur mind from Mr. Cousins is driving the project forward and requires determining what the proposed breakeven for the project is. A proposed budget of $25 million has been determined with the aim of figuring out the break-even of the investment, risks and whether the investment will exceed the budget.

Management Accounting/ Business Concepts: Breakeven Analysis

ANALYSIS 2:

Based on the analysis of Series A project, the budget of $25,000,000 and a selling price of $1,000,000 would have resulted in a breakeven of 25 installations sales. These sales would be made to large corporations, government & educational institutions who demand this sophisticated software for there operations. Demand can be assured since there will be no suppliers to compete against for the short term of 1-2 years before computer manufactures catch up to technological advancement capabilities of Electro Inc. In fact, Electro Inc, will be a first-mover in this product category gaining a sustainable competitive advantage for the near future.

Although, Electro Inc, can benefit from the project, the budget for development cost has exceed expectations by $12,550,000 (see exhibit 2). This means that to breakeven on the $37,550,000 of development cost, 38 installation sales will be needing to be made which is 13 more installations than budgeted. Further consideration of the delay in project has resulted in postponing the completion of the project to approximately mid-way through 1987. Further delay of the project will result in additional cost which must be not taken lightly. Electro Inc, must complete the project since it has already invested 37 million into the project. The company has exposed itself to moderate risk of not completing the project if further actions are not taken. If the project is completed, there is a 2-year window in which installation can be sold to large corporations, government and educational institutions who demand these innovative solutions to operational practices which increase organization utilization. Since there’s minimal competition for the short-term, Electro will be able to attract a reasonable market share of the underdeveloped market.

 By the time competition intensifies, the demand will become spread out between competitors resulting in less market share for Electro Inc. The risk of competing well in the industry will be mitigated through reputation of innovative technology and first mover, but reliability and serviceability must not be compromised. If Electro Inc, cannot match the quality control of its product, Electro Inc, also has the option to sell the development upon completion to interested investors, or computer manufactures at a value that exceeds development cost of $37.5 million.