There are a couple of issues with this option. First of all, this is only a short run solution because over time, due to the higher electric rate as well as potential penalties for over-motoring, companies would prefer to use motors that fit more accurately their power and torque needs. Finally, profitability per unit that DMC currently enjoys with 10-hp motors will drop by 66% after price reduction is in effect (see Exhibit 4). In the long run Dominion should look for a more profitable solution.
2. Reengineer DMC's present 7.5-hp motor to give it a starting torque equal to or greater than that of the Spartan 7.5-hp motor.
This option provides two methods for motor modification: the first is modifying the internal engine components of the 7.5-hp model, which would cause an increase in temperature above National Electrical Manufacturers Association (NEMA) standards, and the second is using a larger motor frame, which would exceed NEMA standards as well. On plus side, neither of these methods would involve additional investment in plant or equipment.
In terms of profitability, the original 7.5-hp motor has a profit contribution of $366 per unit. The modified internal component motor has a profit contribution of $240 per unit and the motor with the larger frame has a profit contribution of $163 per unit (see Exhibit 5). Therefore, both of t...
... middle of paper ...
...even though alternative 1 generates a low profit margin.
The analysis of the alternatives shows that the best profit margins can be achieved thanks to alternative 3. This definite purpose motor would have a large torque, have a significant price advantage over competitors’ 7.5-hp motor, and is exactly what the market wants according to the current market forecast. In addition, with the new electric power rates, it makes fiscal sense for oil companies to use a 5-hp motor over all others to save money in the long run. Also, there is a reasonable chance that the company’s market share can increase to 60% due to the competitive advantage of a definite purpose motor in the oil producing market.
It also should be noted that DMC should consider doing timely market studies to better predict new demands of the market place in order to avoid crisis situations in the future.
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