- As far as the company is concerned, what are the (and how many) products and services are sold or rendered to customers?
The company sells Five type of Fasteners, they are S-Spring, Ring, Prong (B), Prong (S) and Tack and 6 types of Fastener attaching machines. Three of them are automatic which company rents out to the customers whereas three types of machines are manual which the company sell. Apart from this, the company also provides free service for the attaching machines.
- Using information you have in the case, in your own opinion/judgement, itemize exhaustively ALL the products and services of the company?
The company sells Five type of Fasteners, they are
S-Spring, Ring, Prong (B), Prong (S) and Tack
It sells six types of Fastener attaching machines. They are,
a.Hand operated manual attaching machine (M1), b. Foot operated manual attaching machine (M2), c. Pneumatic powered manual attaching machine (M3), Pneumatic powered semi-automatic attaching machine (A1), Pneumatic powered fully-automatic attaching machine (A2), Electrically powered fully-automatic attaching machine (A2).
Three of them are automatic which company rents out to the customers whereas three types of machines are manual which the company sell. Apart from this, the company also provides free service for the attaching machines.
- Are there differences between your own list (2) above and the company’s (1) above?
No there is no difference in the list provided by the company and one compiled by me.
- Are the customers obtaining and benefiting from the company all the products and services you itemized in (2) above, AND is the company charging for ALL these products and services?
The customers are obtaining and benefitting from all the products of the company.
However, the company is not charging for the service of the automatic machines.
However, it requires those customers availing free service to purchase $10,000 worth of fasteners every year. But in actual, the customers are buying on average $7,000 worth of fasteners annually.
- (a.) Is the company incurring any direct costs for many of these products and services in (2) above?
Yes the company is incurring several types of direct costs for the manufacturing of the products and provision of services.
(b.) Can you identify some of these “direct costs”?
Some of these direct costs are costs of material, labor costs, Electricity costs, rent and rates etc.
- Prepare (estimate) the Product/Service Profitability Report for 1986 of the company based on largely your own judgment of (2) above.
Feel free to use Products, Services, combinations of them or Product/Service Groups or Business Segments/Units as the Reports cost object.
- What are the most profitable ones? And the least profitable or loss making ones?
Good estimates are ok.
Estimated attaching machine sales
The attaching machines are thus making loss whereas Fasteners are highly profitable business.
- If you are tapped, with full authourity to lead this company, based on (1) – (7) above. (a.) Explain each of (1) – (7) above, what do you see in each?
There is no particular thing in 1-6. However, 7 shows some eye opening numbers. It is the attaching machines that are making loss whereas fasteners is a highly profitable segment.
(b.) What would you do?
In this case, the basic the problem with the Muller Lehmkuhl is that it was bundling the price of the fastener machines with that of the fasteners. If the company choose to unbundle this deal, the price of its fasteners would come down. The current net profit on fasteners is 29%, so the company can afford to reduce the price of the fasteners without compromising on the quality and even a 10% reduction in the price may give a significant boost to sales and the customers that are switching to the Japanese products may stop doing so. Moreover, the company should do something with its fastener machine business. The company should start selling even its automatic models and start offering modifications at a discounted price in the future. This would reduce the amount of loss the company making on fastener machine sales and thus the overall profitability of the company would improve probably offsetting the decrease in profitability due to a price decrease of fasteners.