Your company produces light sabers and your operation is operating below capacity by 25%. Current production is 75,000 units per year and Marketing indicates that demand at this level will hold for the foreseeable future. Your company makes $20 profit from each jedi weapon.
Dark side light sabers had contacted you with a 3-year RFP which you responded to with pricing data. They are now offering you there contract terms which require you consider your company’s commitment. The contract asks you to produce up to 50K sabers per year and if you can meet their full requirement, you will make a profit of $12.50 per weapon. Jon’s Marketing Department indicates that annual outsourced production needs will be determined and communicated with each annual order and that production request would be for EITHER 50K or 15K and they project that the quantity split determination is 70/30 favoring the 15,000 unit production level.
Jon has also given you an option to only produce a portion of their total potential (50K) requirements. In this case, if you only a portion Jon’s requirements, the per saber profit will be $1 per pointer but that you would only get the first year’s production.
To produce the Jon products, you would do them all in a bulk batch and would have to tear down your production line and undergo set up for their production run with a cost of $750. If needed, you could also outsource a portion of the new production, but your Contracts department estimates your profits would drop $5 per weapon.
Your cost of capital is 10%, so all dollars earned are at full value, however next year’s profits are 90% of the calculated value. Year three profits are 82% of the current year value.
You need to get approval from your Board to sign the contract. Your Board has asked for your choice and analysis as to which option in the contract you should commitment to. The Board meeting is Thursday at 9:30 AM. They require a decision tree plus the cashflow analysis which supports your decision.
A breakdown of the design is below. All you will need to change out is the crystal the laser shines thru from an emerald to a ruby.