Dennis Kwok had been with Mazda Electronics for twelve years, rising from a junior quality control technician to vice president, operations. He had seen the company grow as a manufacturer of monitor screens used in electrocardiometers. In 2001, Mazda produced and sold about 200,000 units of its current model, the ME1001, at an average price of $150 per unit. The firm operates on a net margin of 5 percent and is in a marginal tax bracket of 50 percent. A few months ago, Dennis met with Jackie Brown (V.P., marketing) and her marketing research group. Jackie indicated that a recently incorporated medical group was interested in installing 1 million electrocardiogram monitors over the next five years if the screens and frames could be supplied at an all-in-cost of $100 per unit. Dennis shared this news with Larry McDonald in the engineering R&D department. Larry called back with some exciting news. Engineering was confident that a new model under development, the ME2001, would meet the buying firm’s specifications and could be manufactured at a variable production cost of $65 per unit provided it could use a special plastic frame designed by Burton Plastics, Inc. Burton had approached Mazda’s engineers with a prototype of a 9-inch supertough frame coated with a special chemical that made the frame more elegant and economical. Burton could manufacture 20,000 such frames per month, starting within three months, and offered a price of $30 per unit F.O.B. Mazda’s plant, provided Mazda agreed to use the new frames exclusively for the next five years. This price of $30 per unit was incorporated in the $65 per unit variable cost estimate by engineering for the ME2001. The firm’s cost accountant, Dirk Hageman, estimated that if 200,000 units of the ME2001 were sold, the allocation for fixed general, administrative, and marketing expenses of $4 million per annum would add approximately $20 to the cost per unit. This was based on the assumption that the...
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