Production

Production strategy and company strategy.

Production strategy must be driven by the company strategy to maximise profitability and therefore shareholder value. Specifically, the production strategy is to manufacture the product for as low a unit price as possible at a level to fulfil sales forecasts. Additionally, as the firm grows and increases market share, production capacity must increase accordingly but must do so with increasing efficiency,Profitability is not a direct strategic driver for the production department, rather the main objective is to drive down the unit cost as low as possible with achievable and affordable investment. Therefore production decisions are driven by two main factors: sales/marketing forecasts and the financial position of the company. It has to meet the market demand by satisfying sales/marketing forecast. This objective has been achieved with a steady growth by utilising economies of scale over the last seven periods.

Decision over Hiring/Buying Machine Tools.

The production strategy was based on the intent to take advantage of economies of scale by increasing the number of MTs to reduce the direct unit production cost to the lowest possible level. In general, the company should buy rather than hire MTs primarily because purchasing them would have considerable tax advantages in the form of a tax shield each period against the firm’s profits. Hiring tools would not have any tax advantages but could be used to satisfy short-term production goals or provide a surge capacity since they could be hired and be available for immediate use and then returned after the required number of periods. Another advantage of hiring MTs could be in the situation where the company needed to expand but the debt to equity ratio (D/E) and leverage ratios were already to high. In this situation off-balance sheet financing in the form of leasing the MTs would enable the firm to only report the rental costs on the income statement and keep...