# Dominion Motors

Topics: Electric motor, Variable cost, Costs Pages: 3 (752 words) Published: February 14, 2011
Problem Definition

John Bridges, the chief electrical engineer of Hamilton Oil Company, has concluded through motor testing that DMC competitors Spartan Motors and the Universal Motor Company of Canada offer the first and second choice motors on the market, respectively. DMC’s position as the third choice could prove quite detrimental to its market share because Hamilton is the largest active oil company in Canada, operating over 30% of producing wells, and Bridges is extremely influential in Hamilton’s purchasing policy. The test results will probably carry significant weight throughout the industry because no other company operating in Canada’s oil fields has an electrical engineering department. Thus, DMC will likely lose sales from companies industry-wide, as many will decide to follow Hamilton’s purchasing policy.

Unit Contribution per Alternative

Alternative 1:
Price of 7 ½-hp motor (P): \$1,200
Manufacturing cost of 10-hp motor (k): \$816
Unit contribution = P – k
= \$1,200 - \$816
= \$384

Alternative 2:
Price of 7 ½-hp motor (P): \$1,200
Manufacturing cost of reengineered motor (k): \$790
Unit contribution = P – k
= \$1,200 - \$790
= \$410

Alternative 3:
Price of definite-purpose motor (P): \$1,045
Manufacturing cost (k): \$665
Investment (Fixed Cost): \$75,000
Unit contribution = P – k
= \$1,045 - \$665
= \$380

Break-Even Volume = "Fixed Cost" /"Unit Contribution"
= "\$75,000" /"\$380"
= 198 units

Alternative 4:
Price of 7 ½-hp motor (P): \$1,200
Manufacturing cost (k): \$663.51
Unit contribution = P – k
= \$1,200 - \$663.51
= \$536.49

Recommendation:

Alternative 4, trying to convince Bridges and Hamilton executives that their test conclusions overly emphasize the importance of having the maximum...