Case Study Two –
Automotive Builders, Inc.:
The Stanhope Project
10 July 2012
Questions Provided in Text
1. How did ABI handle forecast risk?
2. Were ABI’s Stanhope site costs in Table 2 derived by a top-down or a bottom-up process? Why?
3. What are the answers to Steve White’s questions?
Steve White’s questions:
* ABI is already achieving an excellent return on investment (ROI). Won’t this investment simply tend to dilute it? * Will the cost in new equipment be returned by an equivalent reduction in labor? Where’s the payoff? * What asset protection is there? This proposal requires an investment in new facilities before knowing whether a long-term contract will be procured to reimburse us for our investment. * Does this proposal maximize ROI, sales potential or total proft?
4. What other factors are relevant to this issue?
5. How do the changes in assumptions mentioned by the other managers affect the proposal?
* Suppose Big Red’s sales only reach 70 percent of our projections in the 1989-1990 time period, or say perhaps as much as 150 percent; how would this affect the project? Does the FMS still apply or would you consider some other form of manufacturing equipment, possibly conventional or CNC with potential aftermarket application in the former case or the transfer machine in the latter case? * Scenario II analysis assumes the loss of substantial volume to competition. This seems rather unlikely. * After-tax margins seem unreasonably high. Can we get such margins on a sole-source contract?
6. What position should Jim take? Why?
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