Question 6: C. R. Plastics Managerial Economics and Quantitative Analysis Question

Comprehensive Exam 1

Question 6: C. R. Plastics — Managerial Economics and Quantitative Analysis Question

The rapid growth of C. R. Plastics over the last several years has resulted in the need for the company to expand production capacity. Historically, the company has run a single shift during the off-season and then added second and third shifts during the highly seasonal plastic furniture sales season characteristic of the industry. Mr. Bailey, the owner, has considered the idea of running production at a constant level during the year—level loading, running two shifts during the entire year. He estimates there would be an additional $550,000 outlay of capital to purchase the equipment required to continue with the seasonal production as contrasted to level loading production processes. Additional savings and costs between the alternative processes will ultimately impact the projected profitability of the company as outlined below.

Part 1 (45%)

Only a conceptual outline is expected in each question of Part 1.

A.Describe the type of industry in which C. R. Plastics competes. Are there competitive factors that could limit the future success of the company despite the recent growth that has been experienced? In your judgment, reading the facts as outlined in the case, would it be advisable for C. R. Plastics' managers to undertake the major expansion of their operations at this point in time? (15%)

B.Identify the types of economic considerations that would influence profitability in making the choice between the present production approach versus making the decision to shift to a "level loading" set of processes. (15%)

C.Are there potential game theory considerations that C. R. Plastics should consider as it makes choices proceeding into the future? Remember to consider the competitive issues you described in section A as you identify these types of issues. (15%)

Part 2 (55%)

C. R. Plastics' analysts have forecasted potential profits that they expect to achieve in 2011 considering the impacts of varied costs of production, distribution, inventory management, and related issues. The varied profit levels and associated probabilities are outlined in the chart below, given the alternative production choices.

A.Calculate the expected value of the profits, the variance, and the coefficient of variation of the estimates made by the C. R. Plastics' analysts. Use the Excel® spreadsheet provided below to evaluate the data and submit your work. (25%)

B.Provide a narrative review of the results, taking into consideration the inputs appropriate to this scenario including your evaluation in Part 1, and make a recommendation about what C. R. Plastics' managers should do going forward. (30%)

CR Plastics MEQA Data.xlsx