Kayo Computer

Kayo Computer assembles and sells personal computers. Each computer needs one
custom-designed printed circuit board (PCB). Kayo has contracted to buy the PCBs from an
outside PCB manufacturer, Apex Manufacturing. The one-year contract stipulates that Kayo
pays 200 per board to Apex for up to 2,000 PCBs. If the annual order quantity exceeds
2,000 PCBs, then Apex is obligated to give a discount of $40 per board for the portion
beyond 2,000, thus selling them at $160.
Kayo can also buy the same PCBs from another manufacturer, TCI Electronics, that
offers a lower price of $120 per PCB but asks a one time payment of $100,000 as a
nonrefundable design and engineering fee. Kayos engineers have determined that Kayo
may use PCBs from either of the two manufacturers, or from both in any mixture without any
manufacturing cost or compatibility problems.
The PCB along with other components are assembled by Kayo into its personal
computer. The variable assembly cost of the Kayo personal computer is $450 each with an
annual fixed cost of $1,500,000. Kayo sells the assembled computer for $1,000 each. At
the moment no one is sure how many Kayo computers the company can sell for the next
year. Jenny Silk, VP of Finance at Kayo Computer, informs you that this model of Kayo
computer will be discontinued after next year and so any one-time fee that might be paid to
TCI must be justified based on next years sales alone. She has asked you to help her
evaluate certain economic and legal issues as part of her financial plan for the next year.
Questions
1.
Build a spreadsheet model that captures the profitability of the Kayo personal
computer for next year. As a start, assume that 5,000 computers can be sold next
year and only 1,000 of the PCBs are purchased from Apex (the balance being
supplied by TCI). (check figure = $470,000)
2.
If total sales were 5,000 units, how many PCBs would you recommend Kayo buy from
Apex and how many from TCI to maximize next years profits? (Use a Data Table to
help you search for your preferred recommendation.)
3.
In reviewing the Apex contract, you note that it requires Kayo to purchase at least
20% of the PCBs used in the Kayo computers sold (and not less than 1,000 PCBs)
from Apex. The contract also contains a liquidated damages clause in the event of
Kayos default in the amount of 100,000. What could be the economic effect if
unforeseen changes caused Kayo to default on the 20%/1,000 minimum contracted
purchase provision (by substituting more TCI boards) in the event that 5,000 Kayo
computers can be sold next year? [create a new worksheet in the same workbook to
answer this question]
4.
A market analysis reveals that unit sales will depend on the price of the computer. At
the price of $1,000, about 5,000 units will be sold, but for every increase (or
decrease) of $100, sales will decrease (or increase, respectively) by 1,000 units. Use
Data Table 2 to maximize Kayos profit next year, by finding (a) the optimal price, and
(b) the optimal number of boards to buy from Apex while still honoring the original
contract. [create a new worksheet in the same workbook to answer this question]
Q2
How many from Apex? _________________
Q3
What is the gross profit if meeting this criteria? ________________________
What is the gross profit if buying the number determined from question 2?
______________________

Q4
Optimum price ___________ Optimum from Apex ___________
Gross profit _________________

Modifications for Part 3

Hint: for E35 you might use an IF

statement with an embedded AND for the
logical test so you can check for two
conditions both being true.

Modifications for Part 4

Influence Diagram for Initial Model

Gross Profit

Total
Cost

Revenue

Kayo
Assy

Sales
Price

Apex Tot
Var Cost

TCI Tot
Var Cost

Tot #
Sales
Based on
Volume

Number Apex
Purchased

Number
TCI

Fixed Cost
(if any)