Bphone and Samsung are two major cell phone manufacturers that have recently merged. Their current market sizes are as shown in Table 1. Bphone has three (3) production facilities in Europe (EU), North America, and South America. Samsung also has three (3) production facilities in Europe (EU), North America, and Rest of Asia/Australia. All demand is in millions of units. The capacity (in millions of units), annual fixed cost (in millions of $), and variable production costs ($ per unit) for each plant are as shown in Table 2. Transportation costs between regions are as shown in Table 3. All transportation costs are shown in $ per unit. Duties are applied on each unit based on the fixed cost per unit capacity, variable cost per unit, and transportation cost. Thus a unit currently shipped from North America to Africa has a fixed cost per unit of capacity of $5.00, a variable production cost of $5.50, and a transportation cost of $2.20. The 25 percent import duty is thus applied on $12.70 (5.00 +5.50 + 2.20) to give a total cost on import of $15.88. For the questions below, assume that market demand is as in Table 1. The merged company has estimated that scaling back a 20-million-unit plant to 10 million units saves 30 percent in fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a plant down (either 10 million or 20 million units) saves 80 percent in fixed costs. Fixed costs are only partially recovered because of severance and other costs associated with a shutdown. i. What is the lowest cost achievable for the production and distribution network prior to the merger? Which plants serve which markets? ii. What is the lowest cost achievable for the production and distribution network after the merger if none of the plants is shut down? Which plants serve which markets? iii. What is the lowest cost achievable for the production and distribution network after the merger if plants can be scaled back or shutdown in batches of 10million units of capacity? Which plants serve which markets? Table 1 Global Demand and Duties for Bphone and Samsung Market N.America S.America Europe (EU) Europe (Non EU) Japan Rest of Asia/Australia Africa Bphone demand 10 4 20 3 2 2 1 Samsung demand 12 1 4 8 7 3 1 Import duties (%) 3 20 4 15 4 22 25 Table 2 Plant Capacities and Costs for Bphone and Samsung Capacity Fixed Cost/Year Variable Cost/Unit Bphone Europe (EU) 20 100 6.0 N.America 20 100 5.5 S.America 10 60 5.3 Samsung Europe (EU) 20 100 6.0 N.America 20 100 5.5 Rest of Asia 10 50 5.0 Table 3 Transportation Costs Between Regions ($ per Unit) N.America S.America Europe (EU) Europe (Non EU) Japan Rest of Asia/Australia Africa N.America 1.00 1.50 1.50 1.80 1.70 2.00 2.20 S.America 1.50 1.00 1.70 2.00 1.90 2.20 2.20 Europe (EU) 1.50 1.70 1.00 1.20 1.80 1.70 1.40 Europe (Non EU) 1.80 2.00 1.20 1.00 1.80 1.60 1.50 Japan 1.70 1.90 1.80 1.80 1.00 1.20 1.90 Rest of Asia/Australia 2.00 2.20 1.70 1.60 1.20 1.00 1.80 Africa 2.20 2.20 1.40 1.50 1.90 1.80 1.00 Management has forecasted that demand in global markets is likely to grow. While Japan, North America and Europe (EU) are relatively saturated and expect no growth, South America, Africa, and Europe (Non EU) markets expect a growth of 20%. The rest of Asia/Australia anticipates a growth of 200 percent. iv. How should the merged company configure its network to accommodate the anticipated growth? v. What is the annual cost of operating the network? vi. There is an option of adding capability at the plant in Rest of Asia/Australia. Adding 10 million units of capacity incurs an additional fixed cost of $40 million per year. Adding 20 million units of additional capacity incurs an additional fixed cost of $70 million per year. If the impacts of shutdown cost and duties remain the same as describe above, how should the merged company configure its network to accommodate anticipated growth? What is the annual cost of operating the new network? vii. If all duties are reduced to 0, how is the optimal network configuration affected? The textbook solutions for these are wrong for question iii and iv