It was indeed one heck of a hectic day for Ramsey Rahul, CPA (Canada) – the new CFO at m-Robot Inc. Between meetings, emails, Data analytics software investments and a host of other things, he had mis
It was indeed one heck of a hectic day for Ramsey Rahul, CPA (Canada) – the new CFO at m-Robot Inc. Between meetings, emails, Data analytics software investments and a host of other things, he had missed his mid-day fifteen minutes workout at work. Albeit a short workout, he always felt recharged and was able to focus better thereon. And there was this urgent email beseeching his attention, and it had come from his CEO – Mack Anish.
For the past four months m-Robot has been operating at full capacity and long-standing customers were not happy with their unfulfilled orders, in some cases for over two months. Some directly emailed the CEO, who being a stickler for efficient business processes and quality, was increasingly losing his patience.
m-Robot-Inc was the brainchild of Mack and his close batch mates, who are PhD graduates from University of Toronto Institute for Aerospace studies with an emphasis in Robotics. With outstanding academic and research credentials and several years of high-end consulting work, they decided to set up a company that will make a difference in people’s lives by freeing them from everyday chores. They became a public company in 2015 and their mission statement read:
“Delight humanity with products that will free them from dull, dirty and dangerous tasks”
m-Robot Inc’s long-term strategic goal is to gain global leadership by designing, developing and building useful Robots of unsurpassable quality by harnessing their full potential and strength in artificial intelligence and robotics technology
To accomplish this overarching objective, the strategic focus areas (in no particular order) are:
- Pride in m-Robot’s products, brands and employees
- Profitable growth through customer responsiveness and business process excellence
- Accountability first
- Improve and Innovate to expand existing markets and penetrate new markets
Being pioneers and first movers in the Canadian market they held a near monopoly in Canada and two of their products, the m-R-Vacuum (V) and the m-R-Mop (M) were runaway successes, and demand always exceeded capacity, subject to limitations described below. Since commencement, a major constraint was production of its super sophisticated material component, v5 micro-controller. The firm has a state-of-the-art in-house manufacturing facility, with a capability to manufacture 800,000 units of this high-end component. One finished m-R-Vacuum robot requires 3 units of v5 micro-controller, whereas 2 units are required per finished m-R-Mop robot. If extra units of v5 are needed, the cost per unit of the component doubles, due to escalated cost of raw material components and labor.
Another bottleneck was the number quality engineers currently employed at m-Robot, their job title being Quality Blackbelt Associate (QBA). This is a highly specialized function, which required multiple skills, so always in great demand in the Canadian job market. They perform several functions, including supervising the auto-assembly process and testing the finished units. Currently there are 20 QBAs in m-Robot Inc’s employment. They typically work a 35-hour week, 48-week year, and average compensation is $100 per hour. Since m-Robot’s is very quality driven, this function is considered super critical for the company’s success. A defective automatic robot for vacuuming or mopping, becomes just an expensive toy and a target of irate customer reviews, in online retail websites like Amazon, causing long term loss of reputation. Typically, a QBA would take 5 minutes to inspect and approve a unit of m-R-Vacuum and 10 minutes to inspect and approve a unit of m-R-Mop.
Barring the above limitations, the company has the capacity to produce 250,000 units each of m-R-Vacuum and m-R-Mop. Budgeted variable selling and administrative costs are $15 per unit for each of the m-R-Vacuum and m-R-Mop models. Fixed manufacturing overheads per unit (see Table 1) are based on the current capacity levels of 250,000 units for each product. Total fixed selling and administrative costs budgeted are $ 300,000 per year. Fixed costs are not expected to be affected by any changes in production or sales.
Customer orders originate from major retail players in Canada and are sold on an order to order basis to m-Robot’s regular customers. With the above constraints, Mack suspects and Ramsey also intuitively feels that production/sales of these two products as it currently operates, are not optimal and profit maximising. They manufacture and sell 300,800 units, of which 225,000 units are m-R-Vacuum and the rest are m-R-Mop. The rationale behind this strategy of selling more of m-R-Vacuum, was to focus on the product that has a higher contribution margin (see Table 1). This has also forced them to buy 26,600 extra components of v5 at twice the cost, while underutilising the existing QBAs, which likely had an adverse impact on the operating income.
Ramsey will have to determine in the short term, what may be the optimal production/sales mix of the two products that will maximise operating Income while also complying with the constraints, without having to make additional procurement of v5.
Based on emails that he was copied on, he knew m-Robot will finalize the recruitment of 2 more QBAs on similar terms as the current QBAs in a month’s time. He thought this will help Ash Ashwin, vice president production to breath a bit easier. Ash has always been under pressure from Gavin Gautham, VP-Marketing to produce more, as they seem to have more big box retailers asking for these products than they can manufacture.
For instance, currently there is an inquiry from a big player in online retail from India, e-Mart, seeking cumulatively 20000 units of both products, in any mix as long as there is minimum of 5000 units of each. The proposal includes a 10% discount on current sales price on both products. m-Robot Inc will be required modify the products for the variation in the Indian Electricity output, for which a one-time investment of a $ 100,000 is needed to buy a sophisticated micro-controller machine. Additionally, $ 50,000 in administrative costs, will also be necessary. There is no re-sale value for the micro-controller machine though. Also, from the time the order is confirmed to the time the payment is realized from e-Mart (a 30 day period), there will be a need for short term (working) capital to cover cost of materials and other costs. This is estimated at $7,500,000 for which m-Robot has a revolving credit arrangement with its bank, at an annual cost of 6%. By the time this order is accepted, Ramsey anticipates that the two QBAs will be on board.
In a previous discussion, Mack was quite firm with Gavin that all additional costs, including the cost of v5, should be recoverable from this order. From a strategic perspective, since there is no certainty that the order from India is of a recurring nature, senior management was quite clear that existing customers should not be forsaken or disadvantaged in any manner.
Ramsey knew he had his work cut out for the upcoming senior management meeting. He will have to report on an optimum production/sales mix, as it currently stands. He also needs to report on the profitability or otherwise, arising out of the order from e-Mart. Gavin had requested information on what may be the minimum price that could be charged, if the current selling price does not look feasible, to breakeven in this order. Ramsey knew that this was purely an intellectual exercise as Mack will likely reject it outright. At the current stage of market demand, the company will not be interested to just break even, nonetheless he decided to include a break-even pricing, and additionally, what price will help them obtain the present contribution margin ratios. Mack also had requested to formulate a draft of financial and non-financial KPIs, that will help the company determine if it is on course to achieve its strategic objectives for the upcoming meeting.
Table 1 (Standard Selling Price and Cost information at 250,000 units, per product capacity)
Cost per unit (standards):
Direct materials (v5 micro controller – 3 components package for m-R-Vacuum and 2 components Package for m-R-Mop)
Variable costs (DL+VOH)
Fixed manufacturing overhead (@ 50% of Variable costs)
Total cost per unit
Take on the role of Ramsey Rahul and provide your recommendations in a report form to the senior management team. Your report should be supported with relevant workings and schedules.A complete professional report with points included in most case analysis methodology (Issues, Analysis, Alternative causes, Solution alternatives, and recommendations/action plan prioritized) could form the content of the report.