Introduction
MacFadden Chemical Company is among the largest chemical firms around the globe. From the year 1980 till the start of 1990’s, the sales of the company was growing at a 10 percent rate. But, with the start of the year 1993, the company realized a decline in its sales growth rate and overall profit. The reason behind this decline was the overcapacity in basic materials in the chemical industry that led to price cutting. Moreover, the companies started to spend huge amounts on their R&D departments as well in order to stay competitive in the market and for marketing purposes.
MacFadden Chemical Company consisted of eleven operating divisions that were categorized in three groups. One of its newest divisions, ‘The Jacob Division’, is the smallest division and unlike other divisions, its products are centred on a single core material. The focus of The Jacob Division is on the speciality industry products like dyes, finishes, and adhesives. It manufactures and sells around a hundred and fifty basic products that come with variety as well. Also, unlike other divisions, the sales of The Jacob Division are done in small lots. Most of its products have a sale of around 500,000 dollars. The Jacob Division is one of the fastest growing divisions of MacFadden Chemical Company.
Case Overview
The Jacob Division of the company has been doing research for a new project. The project is called the Silicone-X project. It is a special-purpose coating that adds slipperiness to the surface it is applied on. The product can be used as a coating on a number of different products in order to reduce friction. From the research done, it is expected that Silicone-X is going to have a large customer base but on the other hand, its sales would be done in small lots.
The project is analyzed by using two different approaches, i.e. labour intensive method and capital intensive method. Both of the methods use different assumptions and techniques and both have different advantages and risks to the overall success of the project. In this report, we have done an analysis on both of the alternates and have suggested the single best alternative to The Jacob Division regarding Silicone-X project.
The Jacob’s Division 2010 Harvard Case Solution & Analysis
Analysis
Question No. 1: Analysis of the Two Cash-Flow Forecasts
The project Manager has used a twenty percent discount rate and has forecasted the performance of the product for fifteen years. The two methods that the company has used for forecasting are listed below.
- Labour-intensive
- Capital-intensive approach.
These two methods are used to generate forecasted cash flows for the product.
Labour-Intensive Approach
In this approach, the company would require a start-up cost of about 900,000 dollars. The variable cost for this approach is constant throughout the years and is about 1.4 dollars per unit. The overhead cost is also fixed throughout the fifteen years and is 210 thousand dollars. Moreover, the cost of depreciation is 60,000 dollars. And, the manufacturing cost is 1.30 dollars per unit.
The sales generated in the first year are1,140,000 dollars,which would increase and reach 2,850,000 dollars by the 15th year..............
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