DiscoPress Case Study Solution
Introduction
DiscoPress is a manufacturer of vinyl recorders, incorporated in 1960. The company manufactures and delivers the titles requested by clients in different quantities. The equipment used in manufacturing of vinyl records are expensive. Therefore, the company needs huge amount of orders so that the cost can be amortized to large amount of units and hence economies of scale can be achieved.
By the passage of time, entertainment industry evolved from record to audio CDs and video DVDs. DiscoPress keeping abreast with the industry manufactures audio CDs, video DVDs and games. The updated software needs low setup cost.
Pace Lochte is the director of an on demand-production unit at DiscoPress and Vinnie Vincenzo is her boss.
Problem Statement
Pace Lochte the director of the on demand-production unit needs to evaluate the proposal of Farnsworth (FFE) and has to report to her boss Vinnie Vincenzo. She has to evaluate either the project is worthwhile for DiscoPress and what is the breakeven point of the investment. Along with this, she is worried about the position of FFE relating to its license and the cost it is ready to bear.
Quantitative Analysis
Currently DiscoPress has many concerns about the contract it signs with Farns worth Filmed Entertainment (FFE). FFE requires some titles and currently, there are two ways of providing it either through mass-production option or through MOD DVDs. DiscoPress are worried about whether the contract will be profitable if they priced MOD DVDs at $3.87/unit and mass-production at $1.16/unit and $600 mastering fees per order. Furthermore, they are keen to know whether the investment of $10000 will be enough for MOD DVDs. And if FFE increased the number of units from 23496 then at what level new investment will be required. Along with this, they also want to know about the breakeven point of the investment. Together with all these they are also conscious about the FFE position that either itwill accept the titles at this cost.
In utilizing MOD option to deliver titles Disco Press will earn a contribution of $1.37/unit. By assuming the discount rate of 10% the project will give an NPV of $14175 in 10 years while if company uses mass-production method then the NPV in 10 years’ time will be approximately $144954. This indicates that whichever option is chosen by DiscoPress the project will be worthwhile. However, if we analyze the cost which will be faced by FFE then we can say that FFE would prefer MOD option as this will cost $90930 which is lower than mass-production option. On the grounds of breakeven analysis MOD DVDs will catch the point at the selling of 7299 units while mass-production will catch at the selling of 24390 units. Hence we can say that according to quantitative analysis selling titles using MOD option will be beneficial for both parties. But if the MOD option is chosen then additional investment will be required once the units required are increased by 1188. See Exhibit for calculations ....................
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