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Decision Modeling Analysis: My Channel 24K Deal Calculations

Decision Modeling Analysis. See attached file for full problem description.

Claude's Memo of Calculations

TO: You
FROM: M. Claude LeMonde
RE: My Channel 24K Deal Calculations
Currently, I am selling the L'Eternite bracelet to Swiss boutiques at the wholesale price of U.S.$210, but I know I won't be able to get that price from Channel 24K. For this deal, I think I can count on a price of at least $195 per bracelet.
We will need a second full-time shift of seven employees?five line workers, one supervisor, one material handler. The five line workers will be paid per unit produced; the supervisor and the material handler will be salaried. I estimate these salaries to be $1,000 per week for the material handler and $1,500 per week for the supervisor. Those figures include their benefits costs. The direct labor costs for the line workers will be $28 per unit produced. I'm a little worried about how quickly we can add these employees, so when I make my proposal to Channel 24K I may offer to supply a slightly lesser number of bracelets in the first quarter. Of course, if they want more, we'll just find a way to meet their demand!
Adding the second shift will mean added energy cost, which I figure to be an average of $6,556.96 per week.
The company's fixed overhead costs for one shift average $4,405 per week. We should figure on the same amount for this second shift, too. We'll be using the new polishing equipment we purchased last year. We are still making quarterly debt payments for this equipment purchase; the good news is that this deal will make it easier to pay off the debt, but the bad news is that we have to make those debt payments so we can't afford a loss in any quarter. Because of this, I need you to focus on our possible quarterly profits or losses.
As for the price of refined gold, our refiner, Nadine Wylder, puts the current price of refined gold at $320 per ounce. So, the per-unit cost of making the L'Eternite bracelet would be $90.97, which I am calculating as follows: gold at $320 per ounce, times 9.17 grams of gold in each bracelet, times .031 ounces per gram.
I can think of other miscellaneous and material costs that I estimate to be $8 per unit produced.
Channel 24K - Leuwen Jewelry Press Release

Channel 24 Karat Announces Exclusive Rights to Spectacular New Design
Channel 24 Karat and the Leuwen Jewelry Company announce their agreement to sell up to 40,000 fine-gold necklaces through on-air promotions over the coming calendar year. Channel 24 Karat will be the exclusive television shopping network carrying the "Olivia" necklace, a new original design. Leuwen Jewelry Company will manufacture and deliver to Channel 24 Karat 10,000 of the "Olivia" necklaces in each of the next four quarters.
The agreement is the latest in a series of exclusive arrangements between independent jewelry makers and Channel 24 Karat, the home-shopping industry leader in jewelry sales.
Channel 24 Karat CEO David Taggart said, "We are delighted today to enter into a partnership with one of the finest and most respected European gold jewelry designers. I hope and expect our sale of the "Olivia" to be just the beginning of a long and valuable relationship for both companies." Channel 24 Karat will begin offering the "Olivia" necklaces on the air within four weeks, and agreed to continue to carry the "Olivia" over the coming calendar year.
Fredrich Leuwen, the founder of Leuwen Jewelry, said, "It is our sincere hope that we may reach a wider audience for our jewelry designs by entering into this agreement with Channel 24 Karat, the leading gold jewelry shop-at-home channel. I look forward to working closely with Mr. Taggart and his staff to provide the finest gold necklaces for customers around the world. We are particularly pleased to be able to offer the 'Olivia' design, one of our newest and best designs."
Channel 24 Karat, founded six years ago by Taggart, is known throughout the jewelry industry as the leader in at-home jewelry shopping. The network consistently offers the finest possible quality, a diverse collection, and the lowest prices on gold jewelry. Over the past two years, new designs offered on the network have frequently become runaway bestsellers.
Leuwen Jewelry is a London-based maker of a full line of fine gold jewelry, including necklaces, bracelets, earrings and other accessories. This will be its first contract with Channel 24 Karat.
For Immediate Release
Channel 24K Press Clipping

By Malcolm Holmes
Special to the New York Daily Tribune
April 12th
Atlanta, Ga.?The tiles in the linoleum of the studio seem to glitter under the super-bright lights, as if tiny bits and pieces of the thousands of gold earrings, necklaces, and bracelets sold here each month have scattered about the floor.
The walls and ceilings of the offices that surround the studio have a deep golden hue; the upholstered chairs in the lobby sparkle with woven strands of gold thread; the mammoth showpiece front doors to the building are encapsulated in hammered 24-karat gold leaf.
And the ink that flows from the pen attached to the visitor's register at the reception desk? Of course: golden.
Just about everything in this small but beautiful office building and television studio speaks to the reason it all exists in the first place: gold, in its many forms and designs. Even in its physical surroundings, Channel 24 Karat, the preeminent shop-at-home jewelry network, stays true to its reputation as the network that can satisfy every taste in fine gold jewelry?and at the lowest possible price. "My company doesn't just sell pretty things made of gold," Channel 24 Karat CEO David Taggart said. "I believe in living every day around gold, in surrounding myself with the golden best. You could say that gold is my life."
Just six years after its founding, Channel 24 Karat (known as "the 24K" to its devotees) is present in over 40 million U.S. homes. The cable network has now expanded and is available in Brazil, Argentina, and Mexico, and most European satellite packages.
Home shoppers generally cite two factors as their primary considerations when shopping on television: price and uniqueness of design. Channel 24 Karat wins rave reviews on both counts.
"I always wondered why people would buy ugly, poorly designed jewelry, when there are so many beautiful pieces in the world," Taggart said. "Eventually I realized that there were two things holding most people back: the high price most stores charge, and lack of access to interesting, lovely jewelry. I founded this company to solve both of those problems."
The 24K is widely recognized as offering rock-bottom prices for its merchandise. Taggart is known as a tough negotiator with his suppliers, squeezing every last reduction in wholesale price from designers in exchange for potentially large orders?significantly larger quantities than most designers could ever hope for elsewhere. (When asked about his reputation, Taggart responded, "It's just good business sense for [our suppliers] to meet our prices.")
Many small jewelry producers have found that with the 24K, there is often little room for negotiation and, as with any large contract with a single buyer, that some independence may be lost. Taggart has occasionally even traveled to his suppliers' production facilities to suggest engineering improvements, in order to reduce the wholesale and final retail prices even more. He admitted that when it comes to design or production changes, "Our suppliers are generally persuaded to do things the way we ask." But the potential increase in sales volume from a 24K contract?for some small producers, an increase dwarfing their usual annual sales?is too tempting for many to pass up.
Although the sheer quantity of units sold by the channel allow it to cut its margins (and its suppliers' margins) to the bone, the quality and originality of the merchandise keeps customers coming back to the channel. Industry analysts agree that in addition to its low prices, much of the success of the 24K can be traced to its wide-ranging collection.
Customer Gloria Fordham of Rochester, New York, said that Channel 24 Karat is different from other home-shopping channels she has watched in the past. "Usually, you don't need to keep watching, because they push the same few items over and over again until they sell out," said the 54-year-old grandmother of two. "But with the 24K, I never know what's going to come up for sale next, so I keep that channel on all day on the television in the kitchen. I don't want to miss a good bargain, you know."
But Taggart said that his company will often carry a particular design for long periods of time, and he credits the vast number of pieces with creating the appearance of ever-changing merchandise. "We don't stop selling a particular design just because it's been featured for a certain number of weeks or months, or because we have sold a certain number," Taggart said. "In fact, we have carried several items for a couple of years now. By featuring each item only a few times per week, however, we create an effective illusion for our customers."
On any given day, the 24K offers hundreds of distinct designs to its gold-jewelry lovers worldwide. Indeed, one of the strengths of the network during its relatively short history has been the breadth and diversity of its collection. Taggart attributes the fine selection to the good taste of his head buyer, Margarita Vazquez. "I first met Margarita 10 years ago, when she was working as a gold-jewelry buyer for Trevor's on Fifth Avenue in New York City," Taggart said. "Her taste was exquisite then, and it's exquisite now."
Vazquez said that she looks for jewelry pieces and designs that will appeal to consumers across national and cultural borders. "A classic is a classic, the whole world round," Vazquez said. "I can't necessarily describe all the essential characteristics of a classic piece of gold jewelry, but I know it when I see it."
As head buyer for Channel 24 Karat, Vazquez constantly travels to seek out new stock. One recent week saw her travel to Barcelona, Casablanca, Johannesburg, Rio de Janeiro, Buenos Aires, and San Francisco on consecutive days. "I have definitely learned the trick to sleeping on the plane!" Vazquez laughed. "But the thrill of finding new, unique pieces [of jewelry] makes it all worthwhile. That, and knowing that our viewers get as excited as I do about gold."
And viewers like grandmother Fordham do get excited. "I used to shop in the mall for my gold jewelry, and when I found a necklace or a bracelet I liked, I would keep an eye on it but wait until the next holiday or birthday or special occasion before I splurged on it for myself," viewer Fordham said. "With Channel 24K, the prices are so low and the pieces are so pretty, I figure, why wait? Every day is like my birthday!"
Reprinted with permission of the New York Daily Tribune
Nadine's Fax with Gold Prices

M. Claude LeMonde
Bijoux LeMonde
24 Rue du Theatre
1211 Geneve 11
Switzerland
Dear M. LeMonde:
It was with great surprise that I listened to the news of your proposal to Channel 24 Karat. I wish you all the best in this endeavor.
Of course, I will do all that I can to ensure that Bijoux LeMonde will be able to satisfy the terms of whatever deal is ultimately struck. Please have faith that Wylder Gold Refining shall supply sufficient quantities of gold to meet your needs, just as we have done for many, many years.
To help you make your proposal, below is a summary of the weekly price and weekly returns of gold over the course of the past year. Although none of us is able to predict the exact price fluctuations of gold, these figures may give you some idea of your expected gold costs. The current price is $320 per ounce.
Please do not hesitate to call on me if there is any further information I can provide. I look forward to continuing the long and productive relationship that Wylder Gold Refining and Bijoux LeMonde have enjoyed and to aiding you through this transition to a larger production effort.
Sincerely,
Nadine Wylder
Weekly Gold Prices over the Past 52 Weeks
Week Price of Gold (End of Week) Weekly Return on Gold
0 $352.41 0%
1 $345.55 -1.95%
2 $359.74 4.11%
3 $358.03 -0.48%
4 $365.35 2.05%
5 $359.60 -1.58%
6 $357.72 -0.52%
7 $359.39 0.47%
8 $348.50 -3.03%
9 $347.38 -0.32%
10 $339.70 -2.21%
11 $345.65 1.75%
12 $336.95 -2.52%
13 $333.13 -1.13%
14 $326.31 -2.05%
15 $314.92 -3.49%
16 $313.22 -0.54%
17 $304.51 -2.78%
18 $310.30 1.90%
19 $307.17 -1.01%
20 $295.81 -3.70%
21 $298.64 0.96%
22 $300.21 0.52%
23 $287.85 -4.12%
24 $301.79 4.84%
25 $311.33 3.16%
26 $313.71 0.76%
27 $332.39 5.96%
28 $324.08 -2.50%
29 $316.71 -2.27%
30 $329.16 3.93%
31 $326.83 -0.71%
32 $316.96 -3.02%
33 $308.17 -2.77%
34 $319.41 3.65%
35 $322.85 1.08%
36 $320.34 -0.78%
37 $321.56 0.38%
38 $316.83 -1.47%
39 $317.77 0.30%
40 $319.67 0.60%
41 $330.29 3.32%
42 $327.38 -0.88%
43 $330.70 1.02%
44 $323.92 -2.05%
45 $323.33 -0.18%
46 $321.74 -0.49%
47 $324.77 0.94%
48 $314.30 -3.22%
49 $319.71 1.72%
50 $326.12 2.01%
51 $314.04 -3.70%
52 $320.00 1.90%

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Solution Summary

Computations and commentary to assist you in completing the deterministic EQA and the simulation EQA in Excel.

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