What is the quantitative analysis in this situation?

Case 11-2 McMichael Inc. own molding shop. It depended heavily on automotive contracts, a situation Bert Wood wished to correct by acquiring more nonautomotive business. In conjunction with MI's engineers, Bert Wood had worked out a mold design for the cream dispenser and included several sug- gestions for minor improvements. The cost of the mold was $56,000, an investment Bert Wood was in no posi- tion to make and that MI would have to absorb up front. Bert Wood quoted a unit price of $0.27 based on pur- chase quantities of 30,000 units at a time and an annual volume estimated at 300.000 units. Bert Wood had sub- mitted a cost breakdown of this quote as follows: Art Flynn, packaging buyer for McMichael Inc. (MI), was working on an import substitution project involving a local minority supplier. He was concemed, however, that his ef- forts would be fruitless because his original proposal had been flatly rejected by the plant manager as too expensive. McMichael Inc., a medium-sized company, had over the years specialized in prescription skin care products, a mar- ket niche in which it had developed an excellent reputation. About three years ago, after extensive testing, MI had intro duced a new facial cream in a special package that allowed for precise measurement of the quantity dispersed. The container, manufactured by a French firm for a different ap- plication, was fairly expensive at an FOB MI's Pictory cost of $0.36. What concemed Art Flynn even more, however, were the quality and delivery problems encountered. Com- munications with the manufacturer were difficult, and Art had the impression the manufacturer did not seem to care much about MI's business, which, as Art knew. was only a small proportion of their total volume produced, With the cooperation of Mi's marketing, engineer ing, production, and quality control personnel, Art had found a local minority supplier who appeared oupable of meeting Mi's requirements. This custom molding firm, OSA Inc., was owned by Ben Wood, a bright engineer, who had purchased the firm several years earlier when the previous owner wished to retire. OSA Inc. had its own tool and die manufacturing operation as well as its Resin Labor Overhead 160 3e 84 276 Ovethead breakdown Power Deprecation 1 le Space insuranc, light and be supervisi 36 When Art submitted this quote along with the request for a $56.000 mold investment up front. the plant manager and 320 Purchasing and Supply Management treasurer both turned it down, arguing that the 24-month pay- back on the mold was far too long and that the company had better investment opportunities with a 12-month payback. Art was disappointed, because he had hoped this proj- ect would assist in helping him meet his savings target for the year. When he talked the idea over with his man- ager, Louise Moffat, she suggested he give it another try. She said, "I am sure that if you can get the mold pay- back down to 15 months, you will get a warmer reception, There are not that many deals around this company that pay for themselves in one year." She also suggested that Art talk to marketing to see if some other products could use the same packaging, and to the production scheduling group to check if different production quantities could be ordered. When Art talked to the marketing people, he found out that the package was ideal for another product to be introduced shortly and with an annual demand estimated at 100.000 units. Marketing had been uneasy about using the French package because of the difficulties encoun tered with it and assured Art that if he could get a reliable domestic source, this option would be highly attractive, The scheduling group, for a number of years, had used a modified MRP system. When Art discussed the new pack- age idea with them, they told him that if the new product and the older one were to be packaged in the same package, a total package requirement of about 40,000 units would make sense and that the master production schedule could easily be adjusted to run the two products in conjunction. Art also discussed the situation with the resin supplier, who indicated that his quote to Bert Wood had been based on the lot size of 30,000 packages, but that a 40,000 unit lot would fall into a new price bracket 5 percent lower than the originally quoted price. Art wondered just what effect all of this new informa- tion would have on his original proposal. He knew that Bert Wood had been adamant about his S0.27 quote. Bert Wood had said, "I know I am classified as a minority sup- plier, But I don't want to hide behind that fact. I want no special favors from any of my customers. Nor am I in a position to make special gifts to anyone else. I have had to borrow at what I consider to be ridiculously high interest rates to buy this company. Now I have to make it pay off. My S0.27 price is as as I can go as far as I can see