Case Write-Up: John Deere & Mueller-Lehmkuhl Gmbh

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Revenue from Manual Machine Sales = M1 Rev + M2 Rev + M3 Rev = $11,445,00

Total Profit from Manual Machines = Total Manual Machine Revenue - Total Manual Machine Production Cost = $11,445,000 - $11,666,666.67 = Loss of $221,666.67

Profit on Rentals: Affects automatic machines only

Assumptions:

• This calculation assumes a yearly profit, over a 10-year usable life-span of a machine, including impacts from service costs

• 1985 = year 0.  1986 = year 1, etc.  

• 10% units returned are adjusted at the very end of the revenue equation.  This assumes all returns are down for a period of 1 year before being reintroduced into the market

• These calculations assume that the cost of retooling a returned machine and the cost of producing a new machine are equal (both are approximately $2,000)

• Total profits do not include any associated benefits from fastener sales associated with machine rentals.

• Production costs are not included in this analysis because they are unknown.  

• All costs are calculated before reductions by tariffs, commissions and distributor markups.

A1 Profit (see Excel spreadsheet for year-over-year calculations for automatic machines):

Determine rental base + production for each year:

• Y1 = 1986 = 1350+350 = 1700 units

• Revenue Y1 = rental fee x number of units = $300 X 1700 = $510,000

• Y2 = 1987 = 1350+350 (2) = 2050 units; Revenue Y2 = $300 X 2050 = $615,000

• Y3 = 1988 = 1350 + 350 (3) = 2400 units; Revenue Y3 = $720,000

• …Y10 = 4850 units; Revenue Y10 = $1,455,000

Total A1 Machine Revenue = $9,825,000 for Years 1-10 X 90% of the units in service = $8,842,500

Average service expense (1986 base year) = service expense / number of units on A1, A2 and A3 units on market = $4,500,000 / ((1350+2,250+3,500)X.9)+350+280+420) = $604.84 service expense per unit on market

Y1-Y10 service expense = cost per unit X Y1-Y10 units on market = $604.84 X ((29,250 X .9) + 3,500) units = $18,039,353

A1 Total Profit = Total Revenue - total service costs - production costs = $8,842,500 - $18,039,353 - production costs (unknown) = LOSS OF $9,196,853

Using the sequence of equations above, we apply the same processes to A2 and A3 machines.

• Total A2 machine revenue (assuming 90% on market) = $17,195,000

• Total A2 service expense = $604.84 X 34,390 = $20,800,447.60

o A2 Total Profit = $17,195,000 - $20,800,448 = LOSS OF $3,605,448

• Total A3 machine revenue = $79,065,000

• Total A3 service expense = $604.84 X 52,710 = $31,881,116.40

o A3 Total Profit = GAIN OF $47,183,884

OVERALL PROFIT FOR Y1-Y10 for all automatic machines = $47,183,884-$3,605,448-$9,196,853 = $34,381,583

Question 4: Exhibit 9 shows the reported product costs for five representative products.  Based on the product line revenues and costs calculated in question 3, how would you revise these product line costs to make them more “accurate”?

Each fastener requires a different level of material, machine time and human labor.  All of these factors can be quantified to a greater degree than what is shown in Exhibit 9. The solution to problem 3 assumes an equal amount of overhead applies to each type of fastener, which is most likely not the case. Further refinement would help identify which fasteners are more lucrative than others and/or which need refinement.

Nothing in the solution to problem 3 addresses the R&D costs which are incurred up front before production.  As mentioned in Exhibit 1, ML exhausted approximately $3.87 million on research and development for fasteners, 50% of which was for high-fashion fasteners.  Ideally, these R&D costs would translate into the final product costs to the consumers.

The high-volume machines used to create specific fasteners require maintenance (tooling) after a certain amount of production.  This tooling cost can be upwards of $50,000 per machine.  These costs have not been included in Problem 3.  It is unclear how many machines the tooling costs affect and how many of the fasteners are produced on those machines.  All of this information would be necessary to finish a more specific analysis of fabrication costs.

A total of 174 machines are used to manufacture the fasteners.  One person can operate several machines at once.  However, it is unclear how the labor burden and benefits affect each fastener type.  There is an opportunity to gather information in this area and get more specific on which type of fastener truly requires more work to produce.