University Finance Case Study: Morden Engineering Make or Buy Decision

The provided case study focuses on Morden Engineering's purchase decisions and financial analysis. The company, facing a make-or-buy decision, must evaluate the costs, risks, and benefits of purchasing parts from a competitor versus manufacturing them in-house. The analysis includes an evaluation of the purchasing manager's arguments, considering factors such as cost savings, warehouse capacity, and the economic value of existing machinery. The study also explores the factors influencing financial decisions, including revenue, profit, resource utilization, and capital efficiency. Recommendations are made regarding the company's future decisions, including the importance of economical choices, cost minimization, and risk assessment, ultimately determining the best course of action for Morden Engineering to maximize profitability and navigate the challenges of its competitive market. The assignment also provides other alternatives the company can try to implement to increase the business.

Running head: INTERNATIONAL FINANCE
International finance
Name of the student
Name of the university
Author’s note

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Executive summary:
The above case study highlights the purchasing decisions of modern engineering of
instalment of new machines and how the process is evaluated in taking the business decisions
of the organization of the company. Apart from that the case study analyses the arguments
made by the purchase managers of the company. The statements also analyse and interpret
the financial investment decisions of the company. The company have also made some
recommendations regarding the policies and procedure and how the decisions are affecting he
business decisions. Lastly a suitable conclusion is provided in support to the statement.

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Table of Contents
Introduction:...............................................................................................................................3
Evaluation of purchase decisions:..............................................................................................3
No economic value:................................................................................................................4
Addition of another assembly machine:.................................................................................4
Limited warehouse capacity:..................................................................................................4
Which factors should (or should not) be taken into account while doing financial analysis?...4
Revenue generation:...............................................................................................................5
Profit generation:....................................................................................................................6
Resource utilization:...............................................................................................................6
Capital efficiency and liquidity:.............................................................................................6
What should be the decision of Morden Engineering?..............................................................6
The decision has to be economical:.......................................................................................7
Cost minimization:.................................................................................................................7
Risks and other alternatives:......................................................................................................7
Conclusion:................................................................................................................................9
References................................................................................................................................10
Introduction:

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The following case study interprets and analyse the purchase decisions taken by
modern engineering which is a well-known company of United States of America and Clyde
engineers who is a competitor brand are producing the same product and offering to sell the
product to modern engineering company. The case study also analyses the situation on what
forced the company management to reject the purchase decisions of the product. The case
study also interprets the statements provided by the company regarding the decision making
and the future effects of this decisions. The decisions taken by the company are backed by the
financial statements provided. Apart from that the decisions are also supported by a suitable
recommendation on what should be decision of the company at this point of time along with a
suitable conclusion supporting the statements of the financial organization.
Evaluation of purchase decisions:
The purchase decisions of any company is affected by different alternatives. It
depends on the predictability and viability of the project, value addition of the project and
lastly how much time the project will take to implement. All these decisions are taken care of
before choosing an appropriate project. Similarly modern engineering is a company who
focuses on producing good quality engineering and mechanical products. For this reason they
have purchased a new machinery for €45000 for manufacturing a part of the machine. The
manufacturing cost of the machine is estimated at 50 pence and 40 pence for raw material
cost. Because of the business this company have a lot of competitor in the market. One such
competitor is Clyde engineers who are a competitive manufacturer of this machine part have
invented a new technology to produce that machine part which will take less time and cost
saving (Erdogan, 2013). Apart from that the company have also offered to supply the
products for 83 cents and also have offered to produce 30000 items of the same part for every
year. According to the purchase manager of the company this offer is very much lucrative
because the cost associated with manufacturing the products are less and also it is time saving

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because of introduction of new technology in production. According to the production
manager the purchase decision of the machine from the competitor is not viable at all because
of the following reasons-
No economic value:
According to the production manger the proposed machine is new and have an
economic life of 8 years. Apart from that the machine can only be used in special cases rather
than in most of the cases and it will cost less value of that machine into the market (Huang
and Kou 2014).
Addition of another assembly machine:
Though the machine is new and provides improved technology to the company, but
still it will not meet all the requirements of the company. Firstly it may cause change in
length of the product by 4mm. this change might cause addition of another machine of €8000.
So the cost of the project will increase.
Limited warehouse capacity:
The company warehouse have the capacity of keeping 15000 units of finished goods
along with raw materials. But keeping more than 15000 units will take more space in the
warehouse.
Which factors should (or should not) be taken into account while doing financial
analysis?
The new machine could have been accepted if it could have meet all the requirements
that the company is trying to achieve. Overall new technologies are always been welcomed
by the company because it takes less time to complete the work and more economical to
follow. Overall new ideas could bring more money to the organization. Still the company
avoided the

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Proposal because of the following issues –
1. The proposal was not economical at all.
2. Addition of another machine may increase the cost of production and more
investment could be needed to complete the project.
3. Addition of products beyond capacity level will cause less space in the warehouse as
well as more costing will be added in warehousing. Apart for that these products are
highly damageable (Gambacorta et al.,2014). So keeping more products in limited
space may damage the goods and can cause business loss.
Hence these are the problems which caused the company to reject the proposal.
Financial analysis is an important aspect involved in financial decision making. It
measures and calculates all the historical data to gain information about the company’s
current financial status and interprets the future financial health of the company. Financial
analysis can be applied in various sources to provide the business managers the information
they require. So it is required for the business managers to properly understand the financial
information and interpret the future decisions. So, according to the company there are various
factors to be included in making decisions about financial statement. The factors are as
follows-
Revenue generation:
Revenues are the main sources of the business. The quantity, quality and time of
revenue determines sustainability of the company in long term. The more revenue the
company gains, the more it will be good for the company to survive in the market.

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Profit generation:
The companies’ duty is to always think about generating good amount of profit. If the
company is able to produce good quality profits then it will be good for the company to
maintain the business after facing strong competition from others players.
Resource utilization:
Survival for any company lies in how well they utilize the available resources with
efficiency. Proper use of resources can help the company to grow more in the future.
Capital efficiency and liquidity:
Capital and general expenditure of the company increases due to more investment
whereas liquidity means the company ability to generate cash to cover expense. Bad liquidity
and lead to bad profitability (Leaver and Reader, 2016).
What should be the decision of Morden Engineering?
A proper financial decision is based on different applied circumstances. It includes
company shareholders, business policies, company rules and regulations and lastly other
business takeovers. A good business decision can certainly bring profits for the business,
similarly bad business decisions can ruin the project or idea (Post, and Byron, 2015).In case
of modern engineering company, the production manager had no choice but to reject the
purchase decision because the process which the competitor is offering is more advanced, but
requires a lot of investment to fulfil the requirements. Part from that the competitor is
proposing to manufacture 30000 units of the product in the calendar year. However modern
engineering have a 15000 unit’s capacity in the warehouse. Hence adding more finished
goods into the warehouse can occupy the spaces left for keeping raw materials as well as

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keeping finished goods. Therefore the costing for keeping additional finished goods will
increase(Vogel, 2014).
Therefore it is recommended that the company must accept those purchase decisions which
will make them profitable in the future. Hence the chairperson must make certain decisions to
cope out the problem. Apart for that he must make certain recommendations on what should
the company may consider in making proper purchase decisions in the future as well as
keeping in mind the financial viability. These are as follows-
The decision has to be economical:
Clyde engineers suggestion to provide technologically improved machine for
manufacturing the products are not economical because the machine is completely new and
provides solution on the selected areas. Apart from that the resale value of the new machine
is €5000 where the existing machines book value is €40000. So the company have to bear a
loss of €35000. Apart from that the rate of return is expected to be 12% per annum, whereas
the company is expecting 20% rate of return for the current year. Therefore the suggestion is
to select project which are more viable for the company.
Cost minimization:
According to the product manager new technologies will be useful for bringing more
money to the organization. However there is no inventory cost is associated with the
company. Hence according to the project manager it’s better to spend €8000 pounds to save
€90000 pounds (Schwalbe, 2015).
Risks and other alternatives:
Every project have its pros and cons (Sierzchula et al., 2014).The projects which are
acceptable from one end could be unacceptable from the other end. Similarly the
recommendations that the company chairperson have stated during the meeting also have

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certain disadvantages. Hence it is important for the company to adopt those decisions which
are profitable for the company (Shahbaz et al., 2013).The risks associated are as follows-
1. The new mechanism implemented is completely unknown to the persons. Hence it would
require some time to learn the process and implement them into the business. Till that
period the production may come to a halt.
2. The process being new require more efficiency. Hence the company need to invest on
giving training to the manufacturers. Therefore the costing may increase.
3. There are certain organizations who maintain traditional process of production. Hence
they might disagree to implement new methods of production.
4. Installing new machines may increase the costing of the project.
5. Apart for that the storing extra products in the warehouse require more space. However if
more products are put into the limited space then there is a high chance of damage. It may
cause business loss to the company (Webb, 2017).
Therefore these are the risks associated with the company’s new recommended
policies. Hence it cannot be ignored that the policies suggested by the company chairperson
are much more influential and will provide much more chance of proficiency in the future.
Apart for that the other alternative options that the company can try to implement are
as follows-
1. More investments could be made on completion of the project.
2. The new expert persons could be recruited by the company to handle the process.
3. Number of warehouses are to be increased to keep more products. Apart from that the
company needs to ensure proper security to the warehouses.
4. The company in order to increase the business may try to set up a new plant.
Hence these are the other alternatives that the company can try to implement.

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Hence the company can take present value since it matches the company requirements of
purchasing machineries .
Conclusion;
Hence it can be concluded from the case study that modern engineering has rejected
the offerings from Clyde engineering because it did not met all the requirements of the
company and the customers. Adopting this policies may affect the business decisions of the
organization. The design of the part could be changed and more and more investment could
be needed to complete install the new process. Since the process adopted by the company is
much more time taking and require lot of training and development. Hence it is
recommended that the company needs to choose those types of projects which are financially

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viable and the utilization if the resources are done perfectly. This is how the company could
survive into the market. However the offerings made by the competitor company was good
only if modern engineering had the infrastructure to accept it. Therefore it is highly
dependent on the project a company wishes to choose and are ready to accept the changes if
needed to implement.
References
Erdogan, A., 2013. Applying factor analysis on the financial ratios of Turkey's top 500
industrial enterprises. International Journal of Business and Management, 8(9).
Gambacorta, L., Hofmann, B. and Peersman, G., 2014. The effectiveness of unconventional
monetary policy at the zero lower bound: A cross‐country analysis. Journal of Money, Credit
and Banking, 46(4), pp.615-642.
Huang, Y. and Kou, G., 2014. A kernel entropy manifold learning approach for financial data
analysis. Decision Support Systems, 64, pp.31-42.

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Leaver, M. and Reader, T.W., 2016. Human factors in financial trading: An analysis of
trading incidents. Human factors, 58(6), pp.814-832.
Post, C. and Byron, K., 2015. Women on boards and firm financial performance: A meta-
analysis. Academy of Management Journal, 58(5), pp.1546-1571.
Russel, T., 2017. Greener purchasing: Opportunities and innovations. Routledge.
Schwalbe, K., 2015. Information technology project management. Cengage Learning.
Shahbaz, M., Khan, S. and Tahir, M.I., 2013. The dynamic links between energy
consumption, economic growth, financial development and trade in China: fresh evidence
from multivariate framework analysis. Energy economics, 40, pp.8-21.
Sierzchula, W., Bakker, S., Maat, K. and Van Wee, B., 2014. The influence of financial
incentives and other socio-economic factors on electric vehicle adoption. Energy Policy, 68,
pp.183-194.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Webb, A., 2017. Using earned value: a project manager's guide. Routledge.