Cameron Auto Parts

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1. Do you agree with Cameron’s decision to grant McTaggart a license? Do you agree with the way Alex went about it? What other options were available to Cameron? What are the advantages and disadvantages of each? The business potential of flexible coupling was evident to Alex. The salespeople were looking for 35$-40$ million during 2004. He realized that the plant can't hold both lines (OEM and flexible coupling). The costs of expansion were too high and required many of the company's resources. The company's cash flow couldn't support a plant expansion. The flexible coupling industry is different than the auto industry. Every dollar of flexible coupling sales requires an investment in inventory and receivables of about 30 cents.…show more content…
What does "reasonable" mean? (Hint: Based on what you know about Cameron’s outlays for developing the product how much does Cameron need to recoup over what period? Cameron expects that $12 million in assets will generate $30 million in flexible coupling sales and a profit of $5 million.) According to exhibit 1: Assets: $12M Profit: $5M Assuming that the debit interest is 7% and the licensing will last 5 years. According to NPV – there is profit of ~7.9M$, which is IRR = 30%. As shown in the table below, 3% royalty out of sales makes 9.1% out of profits: The "25% Rule" suggests that a licensor should receive 25% of the extra profit derived from the licensee's use of the licensed technology. According to that, 9.1% licensor's share of the profit is too low. In order to get the 25% of the extra profit the royalty should be around 10%, according to the table below: Conclusion: Current royalty of 3% - 2% is too low. 4. What conflicts do you foresee in the relationship between Cameron and McTaggart assuming that sales in Europe will increase? How can the two partners address these potential conflicts at this point? Should they? Assuming the sales in Europe will increase, each company may come the conclusion that it is better off on its own than to be restricted to the contract. After a short while, Cameron's managers may think that they know everything there is to know about the European market, and may seek other partners or even try operate on its

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