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Flawed case

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

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

With respect to your first concern, Onboard will not be losing profit in the transition from selling to its current clients to Chip 'N' Chip holding companies exclusively. By making this transition, Onboard will not only satisfy the 16m units of 2-layer PCB it currently sells per annum, but it will be reaching full facility utilization and selling an additional 4m units as well. While there may be inherent opportunity costs and risks involved in making such a rapid transition / putting all of your eggs into a single Chip 'N' Chip-sized basket, there is no real profit lost (based on the information provided) as all units foregone to existing clients will be absorbed by Chip 'N' Chip clients plus more. — Thomas on Nov 03, 2020

With respect to your second concern, I believe the case author may have forgotten to include a chart of information similar to that of charts 1 + 2. When calculating the overall profitability of Onboard's operations, however, I am unclear as to why you would not identify the absolute value of each product's profitability (as is shown in the case). Incorporating the additional 6m units of 3-layer PCB at $3 profit per unit gives an accurate profit contribution of $18m per annum. Had we used the incremental profit value of $1.5 per unit, we would only derive the additional profit earned relative to making 6m units of 2-layer PCB, which is not what the question was asking for. — Thomas on Nov 03, 2020

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