Brandon Production is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable

Question

Current financials for the firm are shown in the table below. In the first option, marketing will increase sales by 50%. The next option is Vendor (Supplier) changes, which would result in a decrease of 10% in the cost of inputs. Finally, there is an OM option, which would reduce production costs by 25%. Which of the options would you recommend to the firm if it can only pursue one option? In addition, comment on the feasibility of each option.

Business Function Current Value
Cost of Inputs $50,000
Production Costs $25,000
Revenue $80,000

Answer 1

Marketing would increase sales to $120,000 ($80,000 ? 1.5 ) but increase cost of inputs and production costs to $112,500 (($50,000 + $25,000 ) ? 1.5 ). This would net an additional $2500 of profit ($120,000 - $112,500 - current profit of $5000 ). Vendor (Supplier) Changes would decrease cost of inputs to $45,000 ($50,000 ? .9 ), resulting in $5,000 of additional profit (savings) ($50,000 - $45,000 ). Finally, the OM option would save $6250 ($25,000 - $25,000 ? .75 ), resulting in an additional $6250 of profit. Thus the OM option is the most profitable. Comments on feasibility should center on the near impossibility of increasing revenue by 50%, while noting the other two options are difficult but not impossible.