Short-term Decision Making with a Strategic Emphasis
Easthof Inc.
Easthof Inc. (Easthof) is a wholesale distributor supplying a wide range of high-end cooking
knives for the professional chef. Easthof has an enviable reputation for quality of its products.
The demand for Easthof ’s products is so great that at times Easthof cannot satisfy the demand
and must delay or refuse some orders, in order to maintain its production quality. Additionally,
Easthof purchases some of its products from outside suppliers in order to meet the demand.
These suppliers are carefully chosen so that their products maintain the quality image that
Easthof has attained.
The Easthof production facilities are highly automated, with more than 100 robots performing
many steps in the knife-making process. The basic shape and the integral bolster of forged
lades are precision forged in a die at 2200 ℉ (1200 °C) and then hardened at 1920 ℉ (1500
°C). Easthof forged knives have more than 40 steps in their manufacturing process.
The company has a Robotics Department that is cu
ently manufacturing the professional chef
knives for the cooking set. Easthof is able to manufacture and sell 150,000 knife sets annually,
making full use of its robotic capacity. Presented below are the selling price and costs
associated with Easthof 's professional chef knives:
Selling Price per Set: $1000
Cost per Set:
Polypropylene Handle $25
High ca
on stainless steel- forged XXXXXXXXXX
Robotics time ($50/hr) 150
Direct Labor 200
Manufacturing overhead 150
Selling and admin. cost 40
Total costs 865
Profit per set of chef knives $135
Because Easthof believes it could sell 200,000 sets of chef knives annually if it had sufficient
manufacturing capacity, the company has investigated the possibility of purchasing the knives
for distribution. Bon Appetit Inc., a steady supplier of quality products, would be able to
provide 30,000 sets of knives per year at a price of $850 per set delivered to Easthof 's facility.
https:
en.wikipedia.org/wiki/Swaging
With the explosion of the healthy eating and organic food phenomenon and the cu
ent open
concept in housing with the kitchen as the center of the home, there is a significant uptick in
the “at home foodie”. Easthof 's product manager has suggested that the company could
make better use of its Robotics Department by manufacturing high-end cutlery for the at-home
market. In fact, to support his position, the product manager has a market study that indicates
an expanding market for high-end cutlery for the home market and a need for additional
suppliers. The product manager believes that Easthof could expect to sell 75,000 sets of high-
end home-market cutlery annually at a price of $500 per set. The estimated costs to
manufacture the cutlery is presented below.
High-End Cutlery data
Selling Price per Set: $500
Cost per Set:
Molded Plastic $25
Ca
on Steel – laser cut 100
Robotics time ($50/hr) 50
Direct labor 75
Manufacturing overhead 50
Selling and admin. cost 20
Total costs 320
Profit per set of home-market knives $180
The home market knife sets are laser-cut from a stainless-steel plate and have only 14 steps in
their manufacturing process.
Other information pertinent to Easthof 's operations is presented below.
Purchased products – other costs: Total fixed and variable selling and administrative costs for
the purchased knives would be $12 per set.
Selling and Administrative costs: An allocated $8 fixed overhead cost per unit is included in the
selling and administrative cost for all purchased and manufactured products.
Manufacturing overhead: The overhead included in the above costs is a combined variable and
fixed amount. In the Robotics Department, Easthof uses Robotics hours as the application base
for manufacturing overhead. Included in the manufacturing overhead for the cu
ent year is
$6,750,000 of fixed, factory-wide manufacturing overhead in the Robotics Department.
REQUIRED:
1) Maximize Easthof Inc.'s profitability, recommending which product or products should
e manufactured and/or purchased. Support your recommendation by an analysis that
will show the associated financial impact. Compare the cu
ent product manufacturing
decision with your alternatives. Compute profitability through contribution margin
using a variable costing income statement.
Hint: This is a Short-term decision. In the short run, fixed costs remain the same. The
financial comparison should only include variable costs.
Hint: The first step is to separate all costs into their respective fixed and variable
components. Overhead and Selling and admin. costs are mixed costs.
2) Recommendations should include the strategic considerations.