Chapter 17, Problem 23P

Norton Products, Inc., manufactures potentiometers. (A potentiometer is a device that adjusts electrical resistance.) Currently, all parts necessary for the assembly of products are produced internally. Norton has a single plant located in Wichita, Kansas. The facilities for the manufacture of potentiometers are leased, with five years remaining on the lease. All equipment is owned by the company. Because of increases in demand, production has been expanded significantly over the five years of operation, straining the capacity of the leased facilities. Currently, the company needs more warehousing and office space, as well as more space for the production of plastic moldings. The current output of these moldings, used to make potentiometers, needs to be expanded to accommodate the increased demand for the main product.

Leo Tidwell, owner and president of Norton Products, has asked his vice president of marketing, John Tidwell, and his vice president of finance, Linda Thayn, to meet and discuss the problem of limited capacity. This is the second meeting the three have had concerning the problem. In the first meeting, Leo rejected Linda’s proposal to build the company’s own plant. He believed it was too risky to invest the capital necessary to build a plant at this stage of the company’s development. The combination of leasing a larger facility and subleasing the current plant was also considered but was rejected; subleasing would be difficult, if not impossible. At the end of the first meeting, Leo asked John to explore the possibility of leasing another facility comparable to the current one. He also assigned Linda the task of identifying other possible solutions. As the second meeting began, Leo asked John to give a report on the leasing alternative.

JOHN: “After some careful research, I’m afraid that the idea of leasing an additional plant is not a very good one. Although we have some space problems, our current level of production doesn’t justify another plant. In fact, I expect it will be at least five years before we need to be concerned about expanding into another facility like the one we have now. My market studies reveal a modest growth in sales over the next five years. All this growth can be absorbed by our current production capacity. The large increases in demand that we experienced the past five years are not likely to be repeated. Leasing another plant would be an overkill solution.”

LEO: “Even modest growth will aggravate our current space problems. As you both know, we are already operating three production shifts. But, John, you are right—except for plastic moldings, we could expand production, particularly during the graveyard shift. Linda, I hope that you have been successful in identifying some other possible solutions. Some fairly quick action is needed.”

LINDA: “Fortunately, I believe that I have two feasible alternatives. One is to rent an additional building to be used for warehousing. By transferring our warehousing needs to the new building, we will free up internal space for offices and for expanding the production of plastic moldings. I have located a building within two miles of our plant that we could use. It has the capacity to handle our current needs and the modest growth that John mentioned. The second alternative may be even more attractive. We currently produce all the parts that we use to manufacture potentiometers, including shafts and bushings. In the last several months, the market has been flooded with these two parts. Prices have tumbled as a result. It might be better to buy shafts and bushings instead of making them. If we stop internal production of shafts and bushings, this would free up the space we need. Well, Leo, what do you think? Are these alternatives feasible? Or should I continue my search for additional solutions?”

LEO: “I like both alternatives. In fact, they are exactly the types of solutions we need to consider. All we have to do now is choose the one best for our company.”

Required:

1. 1. Define the problem facing Norton Products.
2. 2. Identify all the alternatives that were considered by Norton Products. Which ones were classified as not feasible? Why? Now identify the feasible alternatives.
3. 3. For the feasible alternatives, what are some potential costs and benefits associated with each alternative? Of the costs that you have identified, which do you think are relevant to the decision?