Orion Controls Case Essay

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Orion Controls Case

Executive Summary

Faced with the challenge of continuing to remain the leader in industrial valve systems, Orion Controls is required to decide whether or not to carry out product improvement redesigns. A successful redesign will secure the company an initial level of sales of 50 or 90 units to two new customers followed by the benefits of enjoying an innovator’s reputation.

An expected profit of $262,900 resulting from a product redesign given the information available with Orion and current commitments, the company is advised to carry out the redesign and sell to Avion Chemicals and Kemikal. Orion can make a profit of up to $655,000 if successful in achieving dramatic changes in its existing model SV44A-10
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• Break-even Analysis:

Currently, Orion produces the valve at a cost of $8,000 per unit and sells each unit for $10,000; resulting in a 25% mark-up. Orion has agreed to sell the modestly improved valve for $12,000 per unit when the variable costs alone are $10,500; $8000 per-unit manufacturing costs and $2,500 per-unit comprehensive test procedure costs. Orion has decreased its profit margin to 14% without even considering fixed costs. If the short-cut approach works, fixed costs would be $200,000, and Orion needs to sell 133.33 units to breakeven. If the software design takes eight months, fixed cost could be as high as $440,000 and Orion would need to sell 293.33 units to breakeven. However, with a dramatically improved valve and fixed costs of $200,000 Orion will breakeven after selling 20 units and with fixed costs of $440,000, Orion will breakeven at 46.3 units.

• Risk Analysis:

o There is only a 10% chance the entire project will fail; therefore, Orion should take the risk in developing the product. o Orion regularly takes calculated risks to improve profits. One of Orion’s biggest risks involves the software development. Using a short-cut approach and developing the software within three months, the software development phase of the project has a 75% chance of being completed at a cost of $120,000. However, if they are unsuccessful, it will cost Orion three times as much, i.e., $360,000
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