Case 11-3 BudgetRefer to the Carmichael Corporation Case 11-3 at the end of Chapter 11. Using the information given in the case study, explain in detail as to how the purchasing manager can come up with alternatives to maintain organizational profitability.This can be submitted in a MS Word Document, with title page, or as an MS Excel sheet with a clear one-paragraph introduction on the importance of creating a competitive cost structure.Case Study Attached*
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Case 11-3 Carmichael Corporation Amanda Tellford, purchasing manager for Carmichael
Corporation, became increasingly concerned about the purchase of MS-7, a special ingredient used
in Stimgro, one of her company’s new products. It appeared that a major cost increase might
threaten the product’s profitability, and Amanda was anxious to explore any alternatives that
promised at least some cost relief. CARMICHAEL CORPORATION Carmichael Corporation was the
U.S. subsidiary of Carmichael International, a UK-based producer of veterinary products and feed
additives. Total U.S. sales were expected to be about $20 million with profits before taxes of about
$1.2 million. Carmichael occupied a special niche in the market, offering small-volume specialty
products that the bigger producers considered uneconomical. However, if sales of these products
grew, the possibility existed that a larger producer might become interested. Carmichael had an
exclusive distribution agreement with three distributors who covered all parts of the United States.
Each distributor sold Carmichael products to feed stores, cooperatives, and farm supply stores,
which, in turn, sold to the farmer. For Stimgro the pricing structure through the distribution chain
was approximately as follows: The Carmichael plant located in Chicago employed about 70 hourly
rated people. The premises were leased and primary activities involved the mixing of ingredients
and the bottling and packing of finished products. About half of the $8 million worth of ingredients
was imported from the UK parent; the remainder and all packaging were purchased in the United
States. The executive team consisted of Tim Paterson, president and treasurer; Charles Godfrey,
sales manager; Amanda Tellford, manager of accounting and purchasing; and Andrew Hartwick,
plant manager. Carmichael Corporation concentrated on poultry medicines and feed additives.
Three years earlier, Carmichael had introduced Stimgro, a feed additive for young turkeys, which
had shown unusual promise in promoting rapid, healthy development in birds less than one month
old. Shortly thereafter, a competitor, Brisson, introduced a similar product. Because Brisson, like
Carmichael, had its own exclusive distributors, Brisson’s entry into the market did not result in
lower Stimgro sales for Carmichael. Small specialty producers like Carmichael and Brisson did not
compete on price or manufacturing cost. Their big concern was finding new products to sell and
making sufficient profit before the product was taken over by a larger company or lost its market
appeal. Carmichael and Brisson had about equal shares in the Stimgro market with annual sales of
about $1.4 million each. Page 321 EXHIBIT 1 Stimgro manufacturing Carmichael imported the two
primary ingredients for Stimgro from its UK parent and mixed and packaged them in the Chicago
plant. The manufacturing cost for Stimgro is shown in Exhibit 1. Carmichael’s selling price of
Stimgro was $360 per kilogram. Amanda Tellford had tried to find a North American source for MS7 over the past few years but had found that all potential sources, pharmaceutical, and specialty
chemical firms had declined serious interest. They claimed the volume was far too low, and the
price would have to be at least $800 per kilogram before they could be persuaded to manufacture
MS-7. BRISSON Brisson Corporation was a U.S.-owned manufacturer of products similar to those
marketed by Carmichael. Brisson’s range of products was greater than Carmichael’s, and its annual
sales volume was about $24 million. Brisson had originally obtained its MS-7 from a UK competitor
of Carmichael International, but in the spring of the current year it had placed orders for equipment
to manufacture its own MS-7. This action had surprised Amanda Tellford because, like Carmichael,
Brisson had been relatively poorly prepared to take this step. For example, the North American
market demand for MS-7 was limited to its use by Carmichael and Brisson. Although future growth
might show a healthy increase, total current market demand certainly did not warrant the $1 million
investment Brisson had to make. Moreover, MS-7 was tricky to produce, requiring very careful
temperature, pressure, and timing control. The main equipment item was a large glass-lined
autoclave ingeniously instrumented and constructed to deal with the unusual demands of MS-7
production. The autoclave was normally a fairly general-purpose type of equipment in the chemical
industry. However, the special conditions required for the manufacture of MS-7 made this reactor a
special-purpose tool, certainly overdesigned and over-engineered for the other uses to which
Brisson might apply it. MS-7 manufacture was a batch production process, and the expected
capacity of the equipment was about 40,000 kilograms per year based on two-shift operation. In
Amanda Tellford’s eyes, Brisson’s action affected her own purchases of MS-7, which up to this
point had been at an advantageous transfer price from the UK parent. Although the exact impact
was still not entirely clear, she expected at least a 40 percent increase in her laid-down cost.
Amanda had no doubt that Brisson would aggressively seek customs protection from undervalued
MS-7 imports and that at least a 20 percent duty would be applied on the American selling price.
Amanda Tellford, therefore, requested information from the parent company concerning
manufacturing costs of MS-7. She added several other data from her own knowledge and prepared
the following summary: Summary of MS-7 cost and price data Minimum equipment outlay installed
$1 million Delivery on equipment 9â??12 months UK normal market price $224/kg Our laid-down
current cost from Carmichael, UK $200/kg Carmichael (UK) out-of-pocket cost (material, labor, and
variable overhead) $160/kg Estimated minimum laid-down cost in Chicago after Brisson starts
production $280/kg Page 322Amanda Tellford went to see Charles Godfrey, Carmichael’s sales
manager, to discuss possible sales requirements for the future. Charles said, â??It’s really anybody’s
guess. First, it depends on the popularity of turkeys. We are banking on continued growth there.
Second, as soon as the feed companies can develop a suitable substitute for our product, they will
go for it. We appear to be very expensive on a weight basis, although research and actual results
show we represent excellent value. It takes such tiny quantities of Stimgro to improve the overall
quality of a mix that it is difficult to believe it could have any impact. More competition can enter
this market any day. We are just not large enough in the U.S. market to have any strong
promotional impact. Each of our product lines is specialized, of relatively small volume, in an area
where the big firms choose not to operate. Should a larger firm enter this market, they could flatten
us. Now you tell me how to turn this into a reasonable forecast.â? Amanda Tellford replied, â??I’m glad
that’s your problem and not mine, Charles. Anytime you feel you’re ready to put some figures down,
please let me know, because it may become very important for us in the near future.â? In looking
over past figures, Amanda estimated that the second half of this year’s requirements would total
about 1,000 kilograms of MS-7. Amanda decided that she had better think out the effect that
Brisson’s decision to make MS-7 might have on her future purchasing strategy.
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