You have recently taken over a new organization. You are new to the organization

Question

You have recently taken over a new organization. You are new to the organization, but not to leadership. In fact, in your last position as Director of Operations, you led the organization to more efficient production and successful entry into a new product market.

The first thing you notice when you start at Superior Dental Chair is that profit margins are thin. The company has historically competed in the dental chair market with three distinctly different products:

Supreme Chair – high quality and high cost chair. This product is the name brand leader in the market. The price is significantly higher than the other three, but the quality and added features are vastly greater as well. It comes with a lifetime guarantee.

Standard Chair – the middle of the road chair. This product has the same basic features of as the Basic Chair, but less cost to maintain and comes with an annual maintenance package.

Basic Chair – this is the basic, no frills manually operated chair. It does the same basic functions as the other two chairs. It requires annual maintenance which is not provided.

Cheaper manufacturing supplies have led to easier market entry by potential competitors. However, while the cost to produce is substantially higher, you are the only manufacturer to sell the Supreme Chair.

You have decided to examine your current product line and work with your market analyst to determine which of the following two options is in the best interest of the organization:

Maintain the current product line

If you decide to maintain the existing product line, you may implement a process analysis project to identify opportunities for improvement. The project would cost $50,000 and have a 60% chance of increasing net sales by 20%. There is a 10% chance net sales would decrease by 10% and a 30% chance net sales would not change at all from the existing average.

Reduce the product line to a single product

Regardless of production capacity, a single product line has an 80% chance 30% of sales volume from the other two product lines will transfer to the single line. There is a 20% chance you will not increase sales. (Example: If you chose Supreme you would retain 30% of the number of sales from Standard and Basic at the retail price of Supreme)

You may sell off the buildings, equipment and other assets from two product lines. You would break even from the sales based on the debt and outstanding expenses currently owed. Therefore, no profit would be generated from disbanding two product lines. The capacity in your existing building would remain the same and sales would be limited to your production capacity.

Reduce the product line to a single product and covert one or more buildings

You may also choose to covert the equipment from other two products to increase production capacity. Each building would cost $200,000 to convert. The overhead cost per building remains the same. You may choose to convert one or both remaining facilities.   The production capacity depends on the product line selected. Sales increase opportunity listed above remains dependent on production capacity.

OPTION 2 Reduce the product line to a single product

Make a decision tree.

Explanation / Answer

Probability Cost %change in sales Increase in sales 60% $50,000 20% Maintain the product line Decrease in sales 10% $50,000 10% No change in sales 30% $50,000 0% Increase in sales 80% $0 30% Reduce the product line to a single product No change in sales 20% $0 0%

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