Sewmex Case Study

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DATE: 04/28/2012
TO: Dr. Gordon, Gus.
FROM: Angelica Mendiola, Brittany Shepherd, Kiana Willis, and Terri Smith SUBJECT: SEWMEX: Short-Term Profit Planning in an International Setting

SEWMEX is a newly formed sewing factory located in Mexico. SEWMEX, owned by an American company, is incorporated in Mexico as a Mexican company. By contract, the American parent company, SEW Inc. purchases all of SEWMEX’s output. SEW provides all raw materials to SEWMEX. The president of SEW is having suspicions that there are costing issues creating cost distortions across the SEWMEX’s four product lines: pants, shirts, outerwear and other products.

The controller of SEW recently resigned unexpectedly after a disagreement with the president of the company. After his departure, many of his calculations concerning SEWMEX mysteriously disappeared. Given the cost of labor in the U.S. factories, the president of SEW would like to send as much future production to SEWMEX as possible. However, the SEWMEX operation is relatively new and not yet profitable. Therefore, both SEW and SEWMEX could benefit from profit-planning exercises.

As a start the president would like for you, in your capacity as assistant controller, to develop a cost-volume-profit (CVP) model for the SEWMEX facility, which model could be used to address a number of short-term profit-planning issues. In particular, the president would like to get a better handle on exactly what volume of output would be needed to make SEWMEX profitable in the short run (given the present mix of garments produced) and what strategies might be pursued longer term to improve operations and therefore profitability. The president also wonders how, if at all, the issue of foreign exchange rates might complicate the profit-planning process. Therefore, he has charged you with the responsibility of developing the CVP model for SEWMEX, while he looks for a new controller. As someone interested in making a positive impression on the president, you are eager to accept this assignment.

The following will be included in the analysis:
* Efficiency Related Issues
* Summary Report of all Observations and Analysis
* Foreign Exchange Rate
* Foreign Exchange Risk

5. Efficiency-Related Issues

a. Based on the data provided in the case (e.g., Table 2), what is the approximate level of planned plant efficiency (i.e., total SAM output planned per month, relative to total minutes of all assembly labor in the SEWMEX plant)?

Product Line| Average SAM per Unit of Product (in minutes)| Monthly Planned Production Level(in minutes [SAMs])| Pants| 50| 1,200,000|
Shirts| 40| 1,000,000|
Jackets| 90| 200,000|
Other| 20| 100,000|
TOTAL| | 2,500,000 |

The potential output of the plant is shown in the following equation:

500 minutes X 400 operators x 20 days=4,000,000 SAMs

The planned production output for the plant is 2,500,000 SAMs, thus the efficiency of the plant at this output is shown below:

2,500,000 4,000,000=.625 x 100=62.5%

In the context of the SEWMEX, “efficiency” can be interpreted as the number of SAMs (output) produced per month expressed as a percentage of the total time worked. Thus, increased efficiency would be reflected by output per month (measured in SAMs) greater than the total SAMs reflected in Table 2.

b. Based on the current production/sales mix, what overall (or average) efficiency level at SEWMEX is required to breakeven on a monthly basis?

Breakeven SAMs = 1,928,555 per month
Therefore, the efficiency at breakeven point is:
1,928,5554,000,000= .48214 x 100=48.214%
c. Prepare a table indicating the monthly pre-tax income, πB, that would result from changes in plant efficiency (as defined above in (a)) over the range 50% efficiency to 100% efficiency, in increments of 10%. Assume for purposes of this question that demand changes are the cause of monthly production changes and that SEW will continue to...
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