Meridian Telescopes

Topics: Variable cost, Costs, Cost Pages: 6 (1928 words) Published: March 18, 2013
Meridian Telescopes: Production Planning
ACTG 2020 - Section S – Group 6

To: Cathy Kain, President of Meridian
Re: Production Planning


Meridian has been manufacturing fine telescopes for 80 years and has developed a well-earned reputation for quality craftsmanship. The company itself produces and sells two distinct lines of telescopes, which are produced in its 200,000 square feet facility. Furthermore, both lines have been developed to appeal to distinct target audiences who have an interest in the company’s products. The older line, for which there has been steady demand, consists of small professional telescopes that ultimately have laid the foundation for Meridian’s strong reputation. Following the success of this line, the company pursued the development of the Amateur telescope line, targeting households that possess a desire for the product, but are unable to meet the price demand.

The company is now planning to further expand its product line and develop binoculars, of which management believes there is growing demand and predicts initial sales ranging from 50,000 to 100,000 units. The difficulty that management is facing is that the production process would require additional manufacturing space. The production between the two established lines have already reached capacity, and management is now faced with the problem of devising a plan to organize production in such a way that will ultimately maximize their profit. As a criteria to the following analysis, our group of accountants has evaluated the incremental changes in profits under the alternatives that will be discussed shortly. As a result of this evaluation we have provided management with a guideline to implementing a new production process to meet their needs. Prior to the analysis it is important to understand that only the costs that are relevant are used to calculate the analysis. Analysis

Initially, we began with examining the profits associated with each product and analyzed the make or buy benefits associated with each decision and then included the opportunity cost to come to an incremental profit per product undertaking a certain decision. | | Pro Model|

| | Make| | Buy|
Selling Price| | $ 12,000.00 | | $ 12,000.00 |
Variable Costs| | | | |
Labour | | (5,500.00)| | |
Materials| | (2,000.00)| | |
Variable Overhead| (2,750.00)| | |
Total Variable Cost| $ (10,250.00)| | |
Purchase Price| | | | $ (9,000.00)|
CM| | $ 1,750.00 | | $ 3,000.00 |

The professional models currently sell for a price of $12,000. Less variable costs of Labor, Materials, and Variable Overhead we reach a total cost of $10,250 leaving us with a Contribution Margin per unit of $1,750 if we produce it in house. On the other hand all the material, labor and overhead can be avoided from outsourcing the product at a price of $9000 leaving us with a CM of $3000 per unit if we outsource. It is important to note that we do not include the $1800 per unit of selling and marketing expenses because it is our assumption through years of retailing that the 500 units demanded is constant and thus the product variable costs incurred will be fixed at a total cost of $900,000. Thus, whether or not we outsource or make in house this cost will be non-avoidable, and therefore it is not included in conducting our analysis. Using the resulting CM per unit we obtained an additional profit of $1,250 per unit outsourced (simply the benefit from outsourcing – the opportunity cost from producing in house). More importantly by outsourcing production we loosen the restricting constraint of production capacity. Every unit outsourced will free up 100 square feet that will allow us to make 100 Binoculars in-house. | | Binoculars|

| | Make| | Buy|
Selling Price| | $ 300.00 | | $ 300.00 |
Variable Costs| | | | |
Labour | | (45.00)| |...
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