LATEX PRODUCTS, INC.

Analysis of Business Problem

Group 3 Presentation
Decision Question

Should Latex Products Company bid for the

proposed contract from Pentagon Toy
Company and at what price should it place
its bid for the dog and elephant toy

Objective
To optimize profit and sustain
business operations
Decision Alternatives
o Latex Company should not bid for the
proposed contract but should produce
the Dog and Elephant toys and sell
directly to the Retail Market

o Latex Company should bid for the

proposed Contract for latex skin for both
the Dog and the Elephant toys

o Latex Company should bid for the

proposed Contract for latex skin for only
the Dog toy

o Latex Company should bid for the

proposed Contract for latex skin for only
the Elephant toy
Decision Criteria
 Profitability of the calculated bid price

 Capacity to produce

 Bargaining Power and reputation of Latex

Products inc
Profitability Analysis
BREAKEVEN POINT
Dog Elephant
Total production costs (incl maint and overheads) 30.8 cents 32.9 cents
Cost of mould $3,646 $3,971
minimum order 40,000 units 40,000 units

Using the above we them attempt to calculate the number of units that will need to be produced to break even on the cost of production using both upper and lower selling prices.

First we calculate breakeven using the various costs at 35cents per unit assuming the only fixed costs borne is the cost of the mold

At 35 cents Dog Elephant

Breakeven on total cost @ 35cents i.e. FC/(SP-VC) =3646*100/35-30.8 3971*100/35-32.9

86,810 units 189,095 units
Breakeven is possible on dog @ 86,810 units and on elephant @ 189,095 units

The total unit at which both the dog and elephant toys will breakeven at 35cents respectively is at 86,810 units and 189,095 units

At 45 cents Dog Elephant

Breakeven on total cost @ 45cents i.e. FC/(SP-VC) = 3646*100/45-30.8 3971*100/45-32.9

25,676 units 32,818 units
Breakeven is possible on dog @ 25,676 units and on elephant @ 32,818 units

The total unit at which both dog and elephant will breakeven at 45cents repectively is at 25,676 units and 32,818 units
 Profitability Cont’d
Calculating the Net Cash Recovery of both products based on the order schedule provided:-

Dog
Expense Sales Cash recd Sales Cash recd
at 35cents at 45cents
Investment $ (3,646.00) $ (3,646.00) $ (3,646.00)
May 10,000 $ (3,080.00) $ 3,500.00 $ 420.00 $ 4,500.00 $ 1,420.00
June 10,000 $ (3,080.00) $ 3,500.00 $ 420.00 $ 4,500.00 $ 1,420.00
July 5,000 $ (1,540.00) $ 1,750.00 $ 210.00 $ 2,250.00 $ 710.00
Aug 10,000 $ (3,080.00) $ 3,500.00 $ 420.00 $ 4,500.00 $ 1,420.00
Sept 10,000 $ (3,080.00) $ 3,500.00 $ 420.00 $ 4,500.00 $ 1,420.00

NCR $ (1,756.00) $ 2,744.00

Elephant
Expense Sales Cash recd Sales Cash recd
at 35cents at 45cents
Investment $ (3,971.00) $ (3,971.00) $ (3,971.00)
May 10,000 $ (3,290.00) $ 3,500.00 $ 210.00 $ 4,500.00 $ 1,210.00
June 10,000 $ (3,290.00) $ 3,500.00 $ 210.00 $ 4,500.00 $ 1,210.00
July 5,000 $ (1,645.00) $ 1,750.00 $ 105.00 $ 2,250.00 $ 605.00
Aug 10,000 $ (3,290.00) $ 3,500.00 $ 210.00 $ 4,500.00 $ 1,210.00
Sept 10,000 $ (3,290.00) $ 3,500.00 $ 210.00 $ 4,500.00 $ 1,210.00

NCR $ (3,026.00) $ 1,474.00

To determine selling price we compute the price that allows the company to breakeven on the minimum order commitment
i.e. SP = (FC +For
PBxVC)/PB
dog where FC = $3,646
VC = 0.308 cents
PB = 40000 units
Then SP = 0.399 or 39.9 cents

For elephant FC = $3,971

VC = 0.329 cents
PB = 40000 units
Then SP = 0.428 or 42.8 cents
Capacity to Produce
CAPACITY
Next we determine whether the existing plant can handle the production of the number of units required to meet the order as well as the number of units required to breakeven.

Full capacity of plant = $2,000,000

4% of capacity for ducks and rabbit = $80,000
20% of capacity for manufacture of doll skin = $400,000
24% of capacity = $480,000
24% of capacity = almost 25% of sales
Current utilized capacity = 75% or almost 75% of the divisions' Sales with the production of meteorlogical balloons, Sporting bladders and toys
Current unutilized capacity = 25% %

Batch time = 5+10+20+10+90+90+20 = 245 Minutes for production of 75 to 200 individual mold carraige

1 SHIFT TIME = 8HRS OR 8 x 60 =480 MINS 2 SHIFT TIME = 16HRS OR 16 X 60 = 960 3 SHIFT TIME = 24HRS OR 24 X 60 = 1,440 MINS
480/245 = appxt 2 batches 960/245 = APPXT 4 BATCHES 1440/245 = APPXT 6 BATCHES
DOG PRODUCTION FOR ONE DAY 2 BATCHES = 185 UNITS X 2 = 370 UNITS A DAY4 BATCHES = 185 UNITS X 4 = 740 UNITS A DAY 6 BATCHES = 185 UNITS X 6 = 1,110 A DAY
DOG PRODUCTION FOR 5 DAYS IN A WEEK
370 X 5 = 1,850 UNITS 740 X 5 = 3,700 UNITS 1,110 X 5 = 5,550 UNITS
DOG PRODUCTION FOR 4 WEEKS 1850 X 4 = 7,400 UNITS PER MONTH 3,700 X 4 = 14,800 UNITS PER MONTH 5,550 X 4 = 22,200 UNITS PER MONTH
DOG PRODUCTION FOR 1 YEAR 7,400 X12 = 88,800 UNITS PER YEAR 14,800 X 12 = 177,600 UNITS PER YEAR 22,200 X 12 = 266,400 UNITS PER YEAR

1 SHIFT TIME = 8HRS OR 8 x 60 =480 MINS
480/245 = appxt 2 batches
ELEPHANT PRODUCTION FOR ONE DAY
2 BATCHES = 180 UNITS X 2 = 360 UNITS A DAY4 BATCHES = 180 UNITS X 4 = 720 UNITS A DAY
ELEPHANT PRODUCTION FOR 5 DAYS360
IN XA 5WEEK
days = 1,800 UNITS
ELEPHANT PRODUCTION FOR 4 WEEKS
1800 X 4 = 7,200 UNITS PER MONTH
ELEPHANT PRODUCTION FOR 1 YEAR7,200 X12 = 86,400 UNITS PER YEAR
2 SHIFT TIME = 16HRS OR 16 X 60 = 960 3 SHIFT TIME = 24HRS OR 24 X 60 = 1,440 MINS
960/245 = APPXT 4 BATCHES 1440/245 = APPXT 6 BATCHES
6 BATCHES = 180 UNITS X 6 = 1,080 A DAY
720 X 5 days = 3,600 UNITS 1,080 X 5 days = 5,400 UNITS
3,600 X 4 = 14,400 UNITS PER MONTH 5,400 X 4 = 21,600 UNITS PER MONTH
14,400 X 12 = 172,800 UNITS PER YEAR 21,600 X 12 = 259,200 UNITS PER YEAR

if half the capacity is used for dogs 11,100 dogs can be produced per month on a 3 shift basis
and half for elephant 10,800 elephants can be produced per month ona 3 shift basis

Thus there is sufficient capacity to produce more than 10,000 units each of both the dog and the elephant if the plant is operated at 3 Shifts 24hr x 5 days x 4weeks to meet the monthly demand
Latex Products inc on some days may alternate the number of shifts and still meet the production capacity for at least 40,000 units each of the Dog and Elephant toy per annum as agreed in the contract.
Bargaining Power and Reputation of
Latex Products Inc.
 Latex Products inc has a considerable bargaining power in
dealing with Pentagon based on the former being an
important pivotal factor in Pentagons’ doll business which
operates in a cut-throat industry

 Pentagon relied heavily on Latex Products’ reputation for

the manufacturing of high quality products as this helped
the former in promoting its dolls and specialties to buyers

 The above reasons justifies the belief that Pentagon might

be willing to pay a 15% premium for items from Latex
products
Decision
Latex Company should bid for the
proposed contract for latex skin for both
the Dog and the Elephant toys

 Alternative 1 is not advisable being that

Latex Products Company knows very
little about the retail market and they
are a "Manufacturers' manufacturer“

 Alternative 3 and 4 do not fully

optimize the profitability of the
company
 Action Plan
 Considering the existing and potential business offered by Pentagon,
it is recommended that Latex Products Inc. bids for both products at
no less than 39.9 cents for the dog and 42.8 cents for the elephant.
Both products provide positive Net cash recovery in the second
month and as such will contribute positively to the profitability of
the company

 Latex Products should cash in on its reputation for manufacturing

high quality products and bid at a 15% premium on each toy.
Therefore they should bid at 45.9 cents and 49.2 cents for both the
dog and elephant respectively

 Latex Products inc. should also venture into selling the dog and
elephant toys to the retail market through its six salesmen after the
exclusivity of the contract elapses.
Thank You