Westfield Corp - what role might contribution margin play?
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Westfield Corporation makes two different boat anchors -- a traditional fishing anchor and a high end yacht anchor -- using the same production machinery. The contribution margin of the yacht anchor is three times as high as that of the other product. The company is currently operating at full capacity and has been doing so for nearly two years. Ralph Sampson, the company's CEO, want to cut back on production of the fishing anchor so that the company can make more yacht anchors. He says that this is a "no-brainer" because the contribution margin of the yacht anchor is so much higher.
Instructions
As a team, explore the factors that Westfield management should consider before making their final decision. Write a one-page memo to Ralph Sampson describing the analysis that the company should perform. Be sure to address the following in your analysis:
What role might contribution margin per unit of limited resource play in this decision?
Should the marketing department be involved in the decision making process? How important is consumer demand?
Should the company consider expanding their production facilities or purchasing additional equipment?
How might this change affect their company brand or the customer's perception of their brand? Will they be appealing to a different market by only offering yacht anchors?
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Solution Summary
Your response is 446 words and gives Mr. Sampson four potential issues surrounding this idea to switch to higher end anchors. An example is given showing the constraint and discussion explains what is needed to make sure the company's profits improve, rather than decline, with this change.
Solution Preview
Here is a draft to get you started on your work. Please put in your own words.
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Mr. Sampson,
While the contribution margin per unit is an important aspect of the product, it is not the only factor in planning production to maximize total contribution margin of the firm. Since you are at full capacity, we want to produce the anchor product mix that maximizes what we can earn from production. So, we have to consider how much of the machinery time each anchor uses in addition to contribution margin per unit. Here's an example
..................................................................Fishing...........Yacht
Contribution margin ..................................$5.00............$15.00 (3 times fishing)
Machine hours ...
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