“Easton Corporation makes two different boat anchors — a traditional fishing anc

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 2 years. Bjorn Borg, the company’s CEO, want 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.” (Weygandt, Kimmel, & Kieso, 2012).

• What role might contribution margin per unit of limited resource play in this decision?

• Should the marketing department be involved in the decision-making process? How important is consumer demand?

• Should the company consider expanding their production facilities or purchasing additional equipment?

• How might this change affect their company brand or the customer's perception of their brand? Will they be appealing to a different market by only offering yacht anchors?

Explanation / Answer

1.   What role might contribution margin per unit of limited resource play in this decision?

Contribution margin per unit is an indication of how the firm is managing its variable costs and fixed costs and thus how well it will manage the capacity of the plant

2.   Should the marketing department be involved in the decision-making process? How important is consumer demand?

Marketing department can show sales focusers as well as consumer preferences which will justify the production of one product over other.

3.   Should the company consider expanding their production facilities or purchasing additional equipment?

The company should expand production facilities because the contribution margin per unit is good and thus capital expenditure can be incurred.

4.   How might this change affect their company brand or the customer's perception of their brand? Will they be appealing to a different market by only offering yacht anchors?

Products that are aimed at different set of consumers are able to expand the brand to a different category which adds tp the brand image as well as provides the cushion against risk of relying on one product line.

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