Easton Corporation makes two different boat anchors—a traditional fishing anchor

Question

Easton Corporation makes two different boat anchors—a traditional fishing anchor and a high-end

yacht anchor—using the same production machinery. The contribution margin of the yacht anchor is

three times as high as that of the other product. The company is currently operating at full capacity

and has been doing so for nearly two years. Bjorn Borg, the company’s CEO, wants to cut back on

production of the fishing anchor so that the company can make more yacht anchors. He says that

this is a “no-brainer” because the contribution margin of the yacht anchor is so much higher.

Required

Write a short memo to Bjorn Borg describing the analysis that the company should do before it

makes this decision and any other considerations that would affect the decision

Explanation / Answer

Short Memo

To Mr. Bjorn Borg, CEO, Easton Corporation

This has reference to your Propective proposal to cut back on production of the fishing anchor to make more yacht anchors which has higher contribution margin and to which you are calling it "no-brainer".

It is ture that on the face it looks very rosy to switch over to yacht anchor and earn higher margin, but the Company has to do some analysis on "Whether there exist approved capacity of the yacht anchors. Moreover, there is any demand for the yacht anchors which will absorb the excess production" before taking any decision on your Proposed proposal. While analysis, it would be better to have some MOU's of confirm demand.

Other considerations to take the expected decision are:

1. the availability of skilled labor hours which could make yacht anchors.

2. the competitive marketing department exist which can take challenge to market the excess production of yacht anchors.

3. whether the short production and selling of the fishing anchor would shorten the clientale of the Company.

4. does the short selling of the fishing anchor affects the sales of yacht anchors.

So, Company has to under go above analysis before taking any decision on your Proposed proposal.

Thanks

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