Fictional case: Northstar Industrial Products
Choose between two growth orders by connecting revenue, profit, production capacity, and cash timing.
Recommend a response to a manufacturer's sales-growth target using its capacity, customer-service, and cash constraints.
Overview
Northstar Industrial Products has a target to increase next month's sales revenue by 30%. A prospective customer offers enough business to exceed that target, but wants a volume discount. A smaller trial order is also available.
You are the general manager. Choose which order to approve and explain how the company will deliver it without weakening existing customer commitments.
Northstar, its policies, and all figures are fictional teaching assumptions.
Recall Lesson 012: Brook Home delivered more orders on time, yet its on-time delivery rate fell. What did the rising count leave out? Keep that question in mind when reviewing Northstar's growth target.
The business and the target
Northstar manufactures standard replacement pump assemblies for regional maintenance contractors. Buyers value dependable specifications and delivery dates because delays can extend their customers' equipment downtime. They can instead use rival manufacturers or repair existing assemblies.
Sales representatives win orders through direct relationships. Production assembles the pumps, and trained inspectors test every unit before dispatch. Northstar competes on dependable standard products and reliable delivery, with limited customization.
The company normally delivers 100 units per month at $1,000 each. Those same 100 units are already committed for next month. Each unit requires $650 of materials and labor that change with volume. Other monthly expenses total $25,000 and stay unchanged under either option. Ignore income taxes.
Baseline revenue is 100 × $1,000 = $100,000. Baseline profit is $100,000 − (100 × $650) − $25,000 = $10,000.
A 30% revenue increase means another $30,000, giving a $130,000 target. The target does not specify which customers to serve, what discounts to offer, or how much cash to commit.
Capacity and the two offers
Assembly can produce 160 units next month. Inspection can handle 120. Every unit must pass both steps. There is no opening finished inventory or backlog. Materials and delivery transport are available for either option.
Capacity is the amount of work a process can complete in a stated period. Inspection is the current bottleneck, the step limiting completed output.
| Choice for next month | A: Larger order | B: Trial order |
|---|---|---|
| Additional units | 40 | 20 |
| Price per additional unit | $900 | $1,000 |
| Additional inspection arrangement | $6,000 fixed overtime package raises capacity to 140 units | None needed |
The buyer accepts either offer, with all units due next month. Neither choice creates a commitment for later months.
Trained inspectors have confirmed availability for the overtime package. Its $6,000 cost is additional to the $650 per unit and all existing expenses. It preserves the same testing standards. Skipping tests or delaying existing orders is not an approved option.
Cash and authority
Finance has $20,000 available for expansion after reserving cash for existing obligations. All additional unit costs and overtime must be paid before the new customer pays. The customer pays in full the following month, after delivery and acceptance. No deposit or additional borrowing is currently available.
Assume all units are delivered and accepted as planned if capacity and funding are secured. There are no other additional expenses or cash movements. Revenue belongs to the delivery month in this simplified case; collection occurs later.
Only the general manager can approve the new order, its discount, and any revision to the growth target. Sales cannot promise a date before production and finance confirm the plan.
Exercise
Allow 8–10 minutes. Compare the two choices and write a short management brief.
- Identify the capacity constraint. Calculate total units and inspection capacity under each choice.
- Calculate each option's additional revenue, total revenue, and profit improvement. Use additional revenue minus additional unit costs minus overtime. Add the result to the $10,000 baseline profit.
- Calculate cash needed before collection and the funding gap or cash remaining from the $20,000. For B, also calculate this expansion cash after the customer's later payment.
- Recommend A or B. Explain the consequence for the 30% target, name the implementation owner, and select two measures to review. State one assumption to verify before committing.
Attempt your recommendation before reading on.
Answer
Inspection limits normal output to 120 units, even though assembly can produce 160. Existing orders use 100 inspection slots, leaving 20. A needs 140 total units and the overtime package; B needs 120 and fits normal capacity. Both use all planned inspection capacity.
| Monthly amount | A: Larger order | B: Trial order |
|---|---|---|
| Additional revenue | 40 × $900 = $36,000 | 20 × $1,000 = $20,000 |
| Total revenue | $136,000 | $120,000 |
| Additional unit costs | 40 × $650 = $26,000 | 20 × $650 = $13,000 |
| Additional overtime | $6,000 | $0 |
| Profit improvement | $4,000 | $7,000 |
| Total profit | $14,000 | $17,000 |
A's profit improvement is $36,000 − $26,000 − $6,000 = $4,000. B's is $20,000 − $13,000 = $7,000. B produces $3,000 more profit despite lower revenue.
A requires $26,000 + $6,000 = $32,000 before collection. Its funding gap is $32,000 − $20,000 = $12,000. The company cannot execute it under the supplied cash constraints.
B requires $13,000 and leaves $20,000 − $13,000 = $7,000 until collection. After the $20,000 customer payment, these expansion funds reach $27,000. This tracks only cash available for expansion, excluding funds reserved for existing obligations.
Approve B, subject to confirming the operating schedule. It increases revenue by $20,000 ÷ $100,000 × 100 = 20%, missing the 30% target by $10,000 of revenue. The general manager should revise the target explicitly. A would deliver 36% revenue growth if funded, but provides less profit and has an unresolved cash gap.
The case supplies no evidence of later orders. New funding or different terms would require a fresh comparison.
Assign the operations manager to coordinate the trial, with sales confirming the order and finance scheduling payments and collection. Verify that inspection capacity includes realistic allowances for absence and rework. Both options leave zero planned inspection headroom; a staffing problem could threaten delivery.
Review the share of units delivered by their original promised dates and the actual cash available before collection. Inspect quality failures alongside delivery performance. This applies the Institute for Healthcare Improvement's balancing-measure principle: check whether progress in one area creates problems elsewhere. Source: Institute for Healthcare Improvement.
A concise brief is: “Approve the 20-unit trial. It produces $120,000 total revenue and $17,000 profit, requires $13,000 before collection, and leaves no planned inspection headroom. Operations will confirm the schedule and track original delivery promises; finance will track cash. Revise the growth target to 20% for this plan.”
Recall answer: Brook Home's count left out the increase in total orders due. Likewise, Northstar's revenue target alone leaves out profit, funding, and delivery feasibility.
Applying this case
Connect a growth proposal to the customer's reason for buying, the limiting activity, the cash required before payment, and the person authorized to commit. Your recommendation and measures form this week's management brief; no extra assignment is needed.
Sources
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