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Omni Graphics Case Essay

925 words - 4 pages

Case:Omni Graphics is a small manufacturer of electronic products for use in graphics computers. The company has succeeded by being very innovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), Omni management has a lot of experience in both marketing and manufacturing in the electronics industry. A long list of equity investors is betting that the firm will really "take off" due to the growth of specialized graphics software and the increased demand for computers with enhanced graphics capability. However, a number of market analysts say the market for the firm's products is somewhat risky--as it is for many high-tech start-ups--since there are a number of new competitors entering the market, and the technology is not yet proven.Omni's main product is a circuit board (CB3668) that is used in the manufacture of graphics computers. While prices vary depending on the terms of sale and the size of the purchase, the average price for the CB3668 is $100. The expected sales for the coming year is 150,000 units, with growth expected to increase dramatically in the following years. While the future for Omni looks very bright indeed, the firm is new and has not as yet developed a strong financial base. Cash flow management is a critical feature of the firm's financial management, and cash flow numbers are watched closely by top management.At present, Omni is manufacturing the CB3668 in a plant leased from ElecTech. The plant also includes some equipment purchased from ElecTech. About 70 percent of the parts in the product are manufactured by Omni.Omni management is considering a significant reengineering project in which the plant and manufacturing process would be significantly changed. The objective of the project would be to increase the amount of purchased parts (in the new plan, only about 45 percent of the product's parts would be manufactured by Omni) and to reduce the complexity of the manufacturing process. This would also permit Omni to remove some leased equipment and to sell off some of the most expensive equipment in the plant.The costs to manufacture a CB3668 unit are as follows:CurrentManufacturingCost ProposedManufacturingCostMaterials and purchased parts $6.00 $15.00Direct labor (1 hr; 1.1 hr) 12.50 13.75Variable overhead* 25.00 27.50Fixed overhead* 40.00 20.00*applied on the basis of direct labor hoursOther manufacturing information:Current ProposedTotal direct labor hours 68,000 hrs 74,800 hrsNumber of set-ups 3,100 2,700Machine hours 88,000 65,000Average batch size 15,000 13,500General, selling, and administrative costs: $10 per unit and $1,250,000 fixed. These costs are not expected to differ between the current and the proposed manufacturing plan.Required:Explain briefly what you think is or should be Omni's strategy and why.Compute the contribution margin and breakeven in units for CB3668, both before and after the proposed...

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