Task 2 (10 marks) (approximately 500 words) Easton Corporation makes two differe

Question

Task 2 (10 marks) (approximately 500 words)

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

In the present problem, 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 isthree times as high as that of the other product. The company is currently operating at full capacityand has been doing so for nearly two years. Bjorn Borg, the company’s CEO, wants to cut back onproduction of the fishing anchor so that the company can make more yacht anchors. He says thatthis is a “no-brainer” because the contribution margin of the yacht anchor is so much higher.

Easton Company can increase contribution margin of traditional fishing anchor by increasing operational efficiencies ways. We can hire more workers so that our work done in less time and its cost is less variable cost. The company may also implement lean manufacturing or more efficient operational processes. This enables workers to increase productivity at the same labour costs. Each of these would lower costs, resulting in gains in the contribution margin.

So the company should not cut back on production of the finished product.

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