Portal Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Contribution Margin: In managerial accounting, under cost, volume profit analysis contribution margin comes across in which it identifies as the portion of the sales revenue that contributed into the coverage of fixed cost but not used for the coverage of variable cost.

Allocation of total volume: To maximize the operating income, Portal Corporation is in need of allocating the total volume, which is additionally required for its Ogden and Sandy production plant respectively. If the allocation of total volume exceeds the efficiency level of producing its maximum capacity than the operating profit would be reduced.

Further analysis of these components is used in three different alternatives such as established new production plant, outsource the additional production unit required and purchase from third party.

Alternative 1: Develop new plant or expand existing plant

The key factor that motivates the Portal Corporation to go for developing new production plant is the excess capacity and this excess capacity resulted from the prediction of future demand. The demand also increases due to the reason of the seasons as in different seasons demand always changes. For the Portal Corporation if the anticipated demand is not fully filled by Ogden and Sandy plant than the concept of excess capacity occurs and to meet the excess capacity, firm like Portal Corporation should do break even analysis to distribute the excess capacity to its production facilities it have.

Another factor that influences the company to develop new plant or expand the existing plant is to gain the economies of scale by producing more units. By expanding the existing plant Portal Corporation would gain the economies of scale by producing more units that would lead towards decreasing per unit cost. This cost saving would also result in an increase in revenues and also it would be expensed out for increasing the quality of product to be produced. The economies of scale also gives the advantage to improve and adopt the new technologies and shift the focus of the company at its core operations.

On the other side of the fact is that, if portal goes for the expansion of the plant to produce more units it would also increase the cost of investment as at the initial stage the cost is higher.

Alternative 2 - Outsource the production

Outsourcing is another option to meet the predicted demand for the upcoming year as if Portal’s production facility is fully utilizing its production capacity. By outsourcing, the cost would be reduced as producing excess capacity would increase per unit cost of$5 for Ogden plant and 10$ for Sandy Plant. It also saves the variable cost if Portal would use its plant's capacity instead of outsourcing. Such variable cost includes utility cost, maintenance cost of machinery and equipment as it would be used more than its normal capacity than would depreciate it. By outsourcing the production capacity, it not only save the additional cost to be incurred but also increases the revenue.

Alternative 3 – Purchase Finished Goods

Portal Corporation can also purchase the finished product from a third party to meet the upcoming demand for the next year. It is because of the reason that current production facility such as Ogden is utilized at its full capacity and further if any excess capacity could be produced from this plant would lead to produce goods at lower quality that in result in reducing the customers as customers would expect to use high quality products from Portal.

On the other had Sandy plant is not efficiently utilizing this capacity so the remaining additional capacity could be produced in this plant, but if there is more additional capacity left than it should be outsourced as it would have the same impact if any excess capacity would be produced in Sandy plant will lead the quality to be compromised.

IMPLEMENTATION:

To choose from these three alternative the best alternative is to develop new plant or expand its current production facilities. It is because of the reason that if Portal Corporation develops a new plant than that had the higher production capacity than any future demand would be satisfied with the new plant’s additional capacity. As a result, it would give the benefit of generating more revenues and also reduces the cost of giving the economies of scale advantage. Per unit variable and fixed cost would also be reduced and from the new plant and it would also give the benefit to Portal employees to get more benefits in terms of getting higher salaries...................................

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