Flawed case

Question

Hi Guys,

I went through this case, and I have the impression that it has 2 very serious mistakes.

1. I don't understand while we ignore lost profit that Onboard is currently doing while calculating synergies from sourcing 2-layer PCB. In the case, Chip will switch its sourcing of 2-layer PCB to Onboard because it has lower unit costs, which makes perfect sense. But the way how savings are calculated (simply currently born costs by Chip minus costs if switching to Onboard) neglect the fact that Onboard will forego profit it makes on current clients. They produce and sell PCB to their current clients but will stop doing so if Chip&Chip takes over their whole production. This loss in profit is completely ignored in the case, but it lowers ROI and might change recommendation

2. I am not quite sure why we take $3 as a unit profit from sourcing from the Vietnamese plant. In fact, the case states," These boards will generate a profit of $3 instead of $1.5 for the 2-layer ones. If this is is $3 profit instead of $1.5, we need to take incremental profit, which is 1.5, not 3.0! It makes unit profit two times lower compared to the current solution. In calculations like that, we always need to look at incremental values, not the absolute ones.

Happy to get your perspective.

Thank you!

Best

Paweł

Answer 1

Hello,

For the synergies, strictly speaking, we should only consider the delta in capacity so 40% of the German profits at 100% UR and 20% of the Chinese profits at 100% UR, and add the profit from the 3-layer PCB. Regarding your second remark, please note that you should use 3$ profit (and not the delta) as the investment bring an additional capacity and not a switch from 2 to 3-layer PCB.

Coming back to your point on ROI in the first remark, we calculate ROI on the total profits (so not using synergies only or delta). Indeed, the company will pay 80m$ to owe 20% of Onboard which will generate profits (20% of Onboard total profits) even if there is no synergy at all.

Hope this helps,

Best,

Mamoun