Bergerac case report

Topics: Investment, Revenue, Income statement Pages: 6 (1832 words) Published: May 14, 2015


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Executive Summary

This report is a result of an analysis of the case which has been analyzed and reported by Mr. Bob McCarthy, Director of planning who has collected some serious information about the firm Genie Tech. Genie Tech is one of the current suppliers who supply plastic molded parts to Bergerac Systems. Off late the supply of these plastic parts is being a real problem for Bergerac Systems. The reason for the shortages in supply by both Genie Tech and Ellsinore are mentioned as the financial crisis of 2008, both the suppliers are also facing a very competitive and fragmented market with very low margins. As these reasons are putting them in a very difficult situation in supplying the parts, Bergerac faces big trouble in manufacturing the cartridges since the established base has grown big, Bergerac is not able to meet the supply. Hence Mr. Ian McCarthy has to decide to either build the capacity of manufacturing the plastic parts in house or to buy Genie tech who are ready to sell their firm to Bergerac. The capacity of the current machines present in genie tech and the expenses are tabulated, similarly the expenses and capital costs of building capacity in house are also given. Mr. McCarthy has used the data collected to calculate a projection to the year 2010 by backward integration options he finds out the payback period of both the options and finds concludes that building the capacity inside the firm is more economical than buying Genie tech, where in the analysis is short term. This report is based on the analysis which is made for a long term study period of 5 years and the Net income of each year is calculated which includes the capital investments and the annual savings made by each model in each year considering the Net present worth of these two options (Buy and Build) a stronger and a reasonable decision is made.

The analysis has critical findings whose explanations are discussed later, and the findings are Mr. Bob McCarthy’s suggestion of building the capacity inside the firm is a weak recommendation and the reasons are discussed in the following pages The Net Present Worth of the Buy option is more, stating that Bergerac systems should Buy Genie tech and should do the action as soon as possible to rebound from a not very good customer service

Though this analysis has captured most of the important information provided, there are several assumptions made which can vary in the actual. Hence the accuracy of this analysis depends on the accuracy of the prescient data assumed.

Recommendation of Bob McCarthy

Bob has recommended building the capacity inside the firm rather buy Genie tech by making an analysis for just a single year. This recommendation is weak because any financial analysis which is made for selecting investments should be made for a long term study period rather than a single year. Moreover further investigation of the case reveals that Genie Tech supplies components to various other customers too, it is also known that some of these are a long-term agreement which cannot be terminated immediately. It also found that the labor and other expenses for the Genie tech have been calculated for the entire plant capacity, whereas it is studied that Genie tech uses only fifty percent of the capacity to generate the parts which it supplies to Bergerac systems. Hypothetically if Bergerac buys Genie tech the other 50% of its capacity to work with same cost calculated (except the material cost) and this would generate extra revenue and profit which would add up to the annual savings making the unit cost saved approximately double (assuming revenue and profit generated by Genie tech is same for both Bergerac and outside business) which in turn would double the payback period. Hence accepting Bob’s recommendation is not...
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