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1. The UK Manufacturing UK LTD is facing an array of issues that require a sound understanding of cost behaviour, process manufacturing, and capacity utilization, and market pricing pressures. Identify both internal and external issues that the UKM Senior management must consider their impact on their planning for 2023 and beyond? 2. There are few reasonsin cost calculation that caused the 2023 SPx512 product cost to drop by £227 after reflecting the ABC review and the new costing approach? Did spending decrease or just shift? List those costs with supporting numbers. 3. What are the drivers of manufacturing cost? Of product cost? 4. Was it practical or plausible to reduce direct wafer fabrication by 34 per cent or £23m? 5. Should Smith have looked at areas other than wafer fabrication to identify further cost reductions? 6. Why is there still underutilized manufacturing capacity when the SPx256 is being manufactured? Is the pricing model in fact too aggressive? 7. What pricing advantages does UKM's competitor, Top Telecommunicating Plc, have, knowing their TT256 has 33 per cent more die/wafer than the SPx256? (Assume the same wafer, probe, assembly and test costs and yields as the SPx256)

1. The UK Manufacturing UK LTD is facing an array of issues that require a sound understanding of cost behaviour, process manufacturing, and capacity utilization, and market pricing pressures. Identify both internal and external issues that the UKM Senior management must consider their impact on their planning for 2023 and beyond? 2. There are few reasonsin cost calculation that caused the 2023 SPx512 product cost to drop by £227 after reflecting the ABC review and the new costing approach? Did spending decrease or just shift? List those costs with supporting numbers. 3. What are the drivers of manufacturing cost? Of product cost? 4. Was it practical or plausible to reduce direct wafer fabrication by 34 per cent or £23m? 5. Should Smith have looked at areas other than wafer fabrication to identify further cost reductions? 6. Why is there still underutilized manufacturing capacity when the SPx256 is being manufactured? Is the pricing model in fact too aggressive? 7. What pricing advantages does UKM's competitor, Top Telecommunicating Plc, have, knowing their TT256 has 33 per cent more die/wafer than the SPx256? (Assume the same wafer, probe, assembly and test costs and yields as the SPx256)

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Discussion issues In reviewing Smith's assessments and conclusions, has he proposed the optimal recommendations? Specifically: 1. The UK Manufacturing UK LTD is facing an array of issues that require a sound understanding of cost behaviour, process manufacturing, and capacity utilization, and market pricing pressures. Identify both internal and external issues that the UKM Senior management must consider their impact on their planning for 2023 and beyond? 2. There are few reasonsin cost calculation that caused the 2023 SPx512 product cost to drop by £227 after reflecting the ABC review and the new costing approach? Did spending decrease or just shift? List those costs with supporting numbers. 3. What are the drivers of manufacturing cost? Of product cost? 4. Was it practical or plausible to reduce direct wafer fabrication by 34 per cent or £23m? 5. Should Smith have looked at areas other than wafer fabrication to identify further cost reductions? 6. Why is there still underutilized manufacturing capacity when the SPx256 is being manufactured? Is the pricing model in fact too aggressive? 7. What pricing advantages does UKM's competitor, Top Telecommunicating Plc, have, knowing their TT256 has 33 per cent more die/wafer than the SPx256? (Assume the same wafer, probe, assembly and test costs and yields as the SPx256)
severe competitive pressures in their server and workstation product lines and is already demanding a price reduction on the SP. They also insist UKM remain profitable. Sarah Ahmad, head of UKM's new marketing department, determined from industry studies that the price / performance for microprocessors halves every 18 months. To remain competitive, merchant semiconductor companies consistently were offering some combination of price reductions and/or performance improvements, so that their products' price / performance (price per unit of speed) halved every 1.5 years. Thus, for the SPX512 and for every CPU UKM developed and manufactured, Sarah believed the market would require similarly timed price /performance offerings. Sarah knew any price reductions would require offsetting cost reductions if UKM was to remain profitable and wondered what the manufacturing organisation was thinking. As product development was no longer working on any SPx512 performance improvements, Sarah computed the essential price reductions on the SPx512 following the industry model. The SPx512 would continue at the £850 price through Q1 2023, then drop to £637.50 at the start of Q2 2023, drop to £425.00 at the start of Q1 2024 and to £318.75 at the start of Q4 2024. Sarah was troubled by these prices, as she knew AHS was requesting 150,000 units in FY2023, but only 75,000 in FY2024. AHS indicated it expected a customer shift away from workstations and into AHS's new personal computer line. Appendix One presents an overview of the semiconductor manufacturing process typically found in a microprocessor supplier such as UKM. Appendix Two presents an overview of the product costing process used by UKM. Product cost for the SPX512 had remained constant during FY2021 and FY2022 at approximately £665 (see Table 5). Sarah computed cost reductions of approximately £166.25 per year (to £498.75 in FY2023 and £332.50 in 2024) would be necessary to maintain the SPx512's current gross margin of -22%. She wondered if manufacturing could achieve a cost reduction that steep. Concurrent with the SPx512 pricing activities, Dr Khan, head of product development, sent an urgent request to English, Ahmad, Smith and White for £3m in funding. This funding would accelerate the completion of an integer-only microprocessor, the SPX256 and the follow-on CPU, the SPx384. The SPx256, a new product already under development, could be completed with £lm of the additional funding and made available for volume shipment by the beginning of FY2023. The remaining £2m would be spent during FY2023 and FY2024 to complete development and ready the SPx384 for volume shipment by the beginning of FY2024. The SPx256, is a 256 MHz, 20 nanosecond CPU, manufactured like the SPx512, using the present 384-micron technology, but unlike the SPx512, the SPx256 does not have a floating-point processor. The elimination of the floating-point processor reduces the size and power requirements of the CPU. The SPx256 and SPx384 can be packaged in a 168-pin grid array (PGA) that costs £15, that is £35 less than the 339 PGA used by the SPx512. However, the testing parameters of the SPX256 and SPx384 are significantly different than for the SPx512 and require a Bonn tester, which MM&M does not currently own. This £2m tester, if purchased, will add £1.2m in annual depreciation and other direct operating costs, and £800,000 in incremental annual support costs to the present level of manufacturing spending. The SPX256 and SPx384 are targeted as entry devices for AHS's personal computer business. Top Telecommunication (TT) Plc, is the market leader in the 384-micron integer-only microprocessors. Their TT256 CPU (also 256 MHz, 20 nanoseconds) sells for £500. The TT256 has just been announced with volume shipments to coincide with the beginning of UKM's FY2023. UKM's new marketing department estimates the demand for the SPX256 from AHS and potential new external customers could easily exceed 1,000 units per year. To break into this market, Sarah recommended heavy market promotion and a price / performance two times the competitions. Estimates for unit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 for the second £1,000 and over £l, m for a third million-£ advertising expenditure. With this increased pricing pressures from both AHS and the external marketplace, product cost reduction became critical. This fact, coupled with the request from product
Transcribed Image Text:severe competitive pressures in their server and workstation product lines and is already demanding a price reduction on the SP. They also insist UKM remain profitable. Sarah Ahmad, head of UKM's new marketing department, determined from industry studies that the price / performance for microprocessors halves every 18 months. To remain competitive, merchant semiconductor companies consistently were offering some combination of price reductions and/or performance improvements, so that their products' price / performance (price per unit of speed) halved every 1.5 years. Thus, for the SPX512 and for every CPU UKM developed and manufactured, Sarah believed the market would require similarly timed price /performance offerings. Sarah knew any price reductions would require offsetting cost reductions if UKM was to remain profitable and wondered what the manufacturing organisation was thinking. As product development was no longer working on any SPx512 performance improvements, Sarah computed the essential price reductions on the SPx512 following the industry model. The SPx512 would continue at the £850 price through Q1 2023, then drop to £637.50 at the start of Q2 2023, drop to £425.00 at the start of Q1 2024 and to £318.75 at the start of Q4 2024. Sarah was troubled by these prices, as she knew AHS was requesting 150,000 units in FY2023, but only 75,000 in FY2024. AHS indicated it expected a customer shift away from workstations and into AHS's new personal computer line. Appendix One presents an overview of the semiconductor manufacturing process typically found in a microprocessor supplier such as UKM. Appendix Two presents an overview of the product costing process used by UKM. Product cost for the SPX512 had remained constant during FY2021 and FY2022 at approximately £665 (see Table 5). Sarah computed cost reductions of approximately £166.25 per year (to £498.75 in FY2023 and £332.50 in 2024) would be necessary to maintain the SPx512's current gross margin of -22%. She wondered if manufacturing could achieve a cost reduction that steep. Concurrent with the SPx512 pricing activities, Dr Khan, head of product development, sent an urgent request to English, Ahmad, Smith and White for £3m in funding. This funding would accelerate the completion of an integer-only microprocessor, the SPX256 and the follow-on CPU, the SPx384. The SPx256, a new product already under development, could be completed with £lm of the additional funding and made available for volume shipment by the beginning of FY2023. The remaining £2m would be spent during FY2023 and FY2024 to complete development and ready the SPx384 for volume shipment by the beginning of FY2024. The SPx256, is a 256 MHz, 20 nanosecond CPU, manufactured like the SPx512, using the present 384-micron technology, but unlike the SPx512, the SPx256 does not have a floating-point processor. The elimination of the floating-point processor reduces the size and power requirements of the CPU. The SPx256 and SPx384 can be packaged in a 168-pin grid array (PGA) that costs £15, that is £35 less than the 339 PGA used by the SPx512. However, the testing parameters of the SPX256 and SPx384 are significantly different than for the SPx512 and require a Bonn tester, which MM&M does not currently own. This £2m tester, if purchased, will add £1.2m in annual depreciation and other direct operating costs, and £800,000 in incremental annual support costs to the present level of manufacturing spending. The SPX256 and SPx384 are targeted as entry devices for AHS's personal computer business. Top Telecommunication (TT) Plc, is the market leader in the 384-micron integer-only microprocessors. Their TT256 CPU (also 256 MHz, 20 nanoseconds) sells for £500. The TT256 has just been announced with volume shipments to coincide with the beginning of UKM's FY2023. UKM's new marketing department estimates the demand for the SPX256 from AHS and potential new external customers could easily exceed 1,000 units per year. To break into this market, Sarah recommended heavy market promotion and a price / performance two times the competitions. Estimates for unit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 for the second £1,000 and over £l, m for a third million-£ advertising expenditure. With this increased pricing pressures from both AHS and the external marketplace, product cost reduction became critical. This fact, coupled with the request from product
with the beginning of UKM's FY2023. UKM's new marketing department estimates the demand for the SPx256 from AHS and potential new external customers could easily exceed 1,000 units per year. To break into this market, Sarah recommended heavy market promotion and a price / performance two times the competitions. Estimates for unit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 for the second £1,000 and over £l, m for a third million-£ advertising expenditure. With this increased pricing pressures from both AHS and the external marketplace, product cost reduction became critical. This fact, coupled with the request from product development for additional funding, had John English very concerned. He knew it was important to bring out the SPX256 and SPx384 quickly, but the pricing pressures for their market entrance and the pricing pressures from AHS on the SPx512 seemed almost impossible to meet and still achieve a profit in FY2023 and 2024. He knew, however, if he didn't maintain a profitable operation, his tenure would be short. Reduced product costs leading to competitive manufacturing appeared to be the critical factor necessary to sustain UKM's slim profit levels. English asked Smith, the director of operations, to formulate a series of recommendations for developing and manufacturing an expanded CPU product line in FY2023 and FY2024. He asked that the recommendations be completed by the annual two-year budget review, scheduled to commence in a month. English knew that soon after budget review he would have to present a credible business plan to UKM management. He worried how he could develop a viable plan in light of the obstacles. The Smith's plan oductions reduction Simon Smith started his preparation by reviewing the detailed SPx512 product cost (see TABLES below 1, 2 and 3). He immediately assembled a team comprising White from finance, T.Q. Marcel from quality and Dian Ruby from training. The team, led by Mark Spencer, manager of wafer fabrication, conducted a cost review by activity. manager by activity. Simon, like John English, believed significant cost reductions would be necessary to maintain profitability. He had recently taken an executive development course in activity-based costing and knew was a proven method for better understanding cost structures and cost drivers, and highlighting non-value-added work. Smith was unive excited, given the size of the assignment and his belief there were both cost reduction opportunities in manufacturing and necessary improvements in the current standard cost t system. He He felt the current standard cost system c did not properly capture the complexity of UKM's M's production process. He felt an ABC analysis could provide the insight necessary to reduce the SPx512 product cost by the £166 marketing had requested. The team mapped the processes of the entire operation and then reassigned costs to the newly defined activities. The manufacturing support organisations were also better understood. Their key activities were costed, and then each was aligned to the manufacturing operation it supported. UKM's ABC team reset the SPx512 product cost in line with the true practical capacity of the manufacturing process. The team saw capacity utilisation as a major driver of product cost. The old product costing methodology was based on the planned utilisation of each manufacturing process with underutilised manufacturing costs absorbed into product costs. The revised SPx512 product cost was pleasing, but not very surprising to Smith. It confirmed his belief in the inaccuracies of the old costing method. The new SPX512 product cost of £437.50 was £227.61 lower than the £665.11 original cost shown by the old system. It did not make sense to charge the SPx512 for the costs of resources it did not consume. Smith felt he could commit immediately to Sarah's 2023 product cost reduction request of £166. To achieve the 2024 product cost goal of £332.50, Smith and his team looked further into the activity-based costing results. The study clearly showed that wafer fabrication was the largest area of manufacturing cost. Smith computed that if the SPx512 wafer cost was reduced from the 2023 level of £3,000/wafer to £1,866/wafer, the SPx512 total product cost would be lowered by £105, achieving the desired £332.50. To obtain a wafer cost of £1,866, spending reductions of -£25.5m or 38 per cent in wafer
Transcribed Image Text:with the beginning of UKM's FY2023. UKM's new marketing department estimates the demand for the SPx256 from AHS and potential new external customers could easily exceed 1,000 units per year. To break into this market, Sarah recommended heavy market promotion and a price / performance two times the competitions. Estimates for unit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 for the second £1,000 and over £l, m for a third million-£ advertising expenditure. With this increased pricing pressures from both AHS and the external marketplace, product cost reduction became critical. This fact, coupled with the request from product development for additional funding, had John English very concerned. He knew it was important to bring out the SPX256 and SPx384 quickly, but the pricing pressures for their market entrance and the pricing pressures from AHS on the SPx512 seemed almost impossible to meet and still achieve a profit in FY2023 and 2024. He knew, however, if he didn't maintain a profitable operation, his tenure would be short. Reduced product costs leading to competitive manufacturing appeared to be the critical factor necessary to sustain UKM's slim profit levels. English asked Smith, the director of operations, to formulate a series of recommendations for developing and manufacturing an expanded CPU product line in FY2023 and FY2024. He asked that the recommendations be completed by the annual two-year budget review, scheduled to commence in a month. English knew that soon after budget review he would have to present a credible business plan to UKM management. He worried how he could develop a viable plan in light of the obstacles. The Smith's plan oductions reduction Simon Smith started his preparation by reviewing the detailed SPx512 product cost (see TABLES below 1, 2 and 3). He immediately assembled a team comprising White from finance, T.Q. Marcel from quality and Dian Ruby from training. The team, led by Mark Spencer, manager of wafer fabrication, conducted a cost review by activity. manager by activity. Simon, like John English, believed significant cost reductions would be necessary to maintain profitability. He had recently taken an executive development course in activity-based costing and knew was a proven method for better understanding cost structures and cost drivers, and highlighting non-value-added work. Smith was unive excited, given the size of the assignment and his belief there were both cost reduction opportunities in manufacturing and necessary improvements in the current standard cost t system. He He felt the current standard cost system c did not properly capture the complexity of UKM's M's production process. He felt an ABC analysis could provide the insight necessary to reduce the SPx512 product cost by the £166 marketing had requested. The team mapped the processes of the entire operation and then reassigned costs to the newly defined activities. The manufacturing support organisations were also better understood. Their key activities were costed, and then each was aligned to the manufacturing operation it supported. UKM's ABC team reset the SPx512 product cost in line with the true practical capacity of the manufacturing process. The team saw capacity utilisation as a major driver of product cost. The old product costing methodology was based on the planned utilisation of each manufacturing process with underutilised manufacturing costs absorbed into product costs. The revised SPx512 product cost was pleasing, but not very surprising to Smith. It confirmed his belief in the inaccuracies of the old costing method. The new SPX512 product cost of £437.50 was £227.61 lower than the £665.11 original cost shown by the old system. It did not make sense to charge the SPx512 for the costs of resources it did not consume. Smith felt he could commit immediately to Sarah's 2023 product cost reduction request of £166. To achieve the 2024 product cost goal of £332.50, Smith and his team looked further into the activity-based costing results. The study clearly showed that wafer fabrication was the largest area of manufacturing cost. Smith computed that if the SPx512 wafer cost was reduced from the 2023 level of £3,000/wafer to £1,866/wafer, the SPx512 total product cost would be lowered by £105, achieving the desired £332.50. To obtain a wafer cost of £1,866, spending reductions of -£25.5m or 38 per cent in wafer
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