VortecInc. manufactures medical probes. The company has two divisions, themanufacturing division and the marketing division. According toVortec Manufacturing income statement, the offer for the additional2,000 units should be rejected. . is involved inmanufacturing and as a result, the company incurs fixed costs such asrent and taxes which have to be paid regardless of whether thecompany conducts any business or not[CITATION BPP153 p 44 l 1033 ].Theoffer should be rejected because the revenue from the extraproduction would not generate any profit. In fact, the 2,000 unitswould make a loss of $ 940 (2,000* $4 = $ 8,000 – (2,000*4.47 = $8,940). The 2,000 units manufactured would instead reduce Vortec’sInc. net profit to $ 21,500. . would generate only $ 0.215(21,500/100,000) per unit as opposed to the former $0.225 profit perunit generated for the first 10,000 probes. Despite having capacityfor 102,000 probes, Vortec should not accept the order to process theorder for the additional 2,000 units at a price of $ 4. In order for. to break even, it would require a price of $ 4.47. Thebreak-even price required is $ 0.47 more than what Medsupplies isasking to be charged. Therefore, if Vortec accepted the offer, itwould incur a loss of $ 0.47 for every additional 2,000 unitsmanufactured. In other words, Vortec would have to bear the loss of $940 if it decides to take up the offer from Medsupplies.
Themanufacturing division is evaluated based on the average cost perprobe while the marketing division is evaluated on sales revenue. Inorder to maximize the shareholder’s wealth, the company shouldconsider putting the following measures in place. The manufacturingdivision should increase the number of probes manufactured. It isevident that . would realize a decrease of $ 0.03 inaverage cost from the production of an extra 2,000 units. This is asa result of economies of scale, which brings down the cost ofproduction per unit as more units are manufactured [CITATION BPP14 p 136 l 1033 ].Inaddition, Vortec should seek other alternatives besidesmanufacturing. Vortec should for instance compare its cost ofproduction with what other competitors in the industry charge. If. establishes that the same probes could be manufactured ata lower cost by other manufactures, the company should sub-contractthe production of probes if any cost savings can be realized. Thiswould ensure that the company saves some costs in regards tomanufacturing while at the same time it could gain revenue by sellingthe probes. On the other hand, since the marketing division isevaluated on sales revenue, the division should negotiate withMedsupplies for a better price if Medsupplies could agree todistribute more units for the company. However, the price chargedshould cover the cost of production and administrative expenses. Theprice should not be less than $ 4.96 because at this price, Vortecwould at least break-even in the manufacture of probes. ($4.47,cost/per unit + $ 0.49 (50,000/102,000)) for the additional 2,000units. A price of $ 4.97 for instance, would guarantee the firm aprofit of only $ 20 ($ 4.97 * 2,000 – ($ 4.47 + $ 0.49) 2,000).. could also consider working with more distributorsbesides Medsupplies in order to get better prices for its product.
BPP Learning Media. (2014). Performance Management. London: BPP Learning Media.
BPP Learning Media. (2015). Management Accounting. London: BPP Learning Media.