Discussion issuesIn reviewing Smith's assessments and conclusions, has he proposed the optimal recommendations? Specifically:1. The UK Manufacturing UK LTD is facing an array of issues that require a sound understanding of cost behaviour, process manufacturing, and capacity utilization, and market pricing pressures. Identify both internal and external issues that the UKM Senior management must consider their impact on their planning for 2023 and beyond? 2. There are few reasonsin cost calculation that caused the 2023SPx512 product cost to drop by £227 after reflecting the ABC review and the new costing approach? Did spending decrease or just shift? List those costs with supporting numbers. 3. What are the drivers of manufacturing cost? Of product cost? 4. Was it practical or plausible to reduce direct wafer fabrication by 34 per cent or £23m?5. Should Smith have looked at areas other than wafer fabrication to identify further cost reductions?6. Why is there still underutilized manufacturing capacity when the SPx256 is being manufactured? Is the pricing model in fact too aggressive? 7. What pricing advantages does UKM's competitor, Top Telecommunicating Plc, have, knowing their TT256 has 33 per cent more die/wafer than the SPx256? (Assume the same wafer, probe, assembly and test costs and yields as the SPx256) severe competitive pressures in their server and workstation product lines andis already demanding a price reduction on the SP. They also insist UKM remainprofitable.Sarah Ahmad, head of UKM's new marketing department, determined from industrystudies that the price / performance for microprocessors halves every 18 months. Toremain competitive, merchant semiconductor companies consistently were offeringsome combination of price reductions and/or performance improvements, so that theirproducts' price / performance (price per unit of speed) halved every 1.5 years. Thus,for the SPX512 and for every CPU UKM developed and manufactured, Sarah believedthe market would require similarly timed price /performance offerings. Sarah knew anyprice reductions would require offsetting cost reductions if UKM was to remainprofitable and wondered what the manufacturing organisation was thinking.As product development was no longer working on any SPx512 performanceimprovements, Sarah computed the essential price reductions on the SPx512following the industry model. The SPx512 would continue at the £850 price throughQ1 2023, then drop to £637.50 at the start of Q2 2023, drop to £425.00 at the start ofQ1 2024 and to £318.75 at the start of Q4 2024. Sarah was troubled by these prices,as she knew AHS was requesting 150,000 units in FY2023, but only 75,000 in FY2024.AHS indicated it expected a customer shift away from workstations and into AHS'snew personal computer line.Appendix One presents an overview of the semiconductor manufacturingprocess typically found in a microprocessor supplier such as UKM. AppendixTwo presents an overview of the product costing process used by UKM.Product cost for the SPX512 had remained constant during FY2021 and FY2022 atapproximately £665 (see Table 5). Sarah computed cost reductions of approximately£166.25 per year (to £498.75 in FY2023 and £332.50 in 2024) would be necessary tomaintain the SPx512's current gross margin of -22%. She wondered if manufacturingcould achieve a cost reduction that steep.Concurrent with the SPx512 pricing activities, Dr Khan, head of product development,sent an urgent request to English, Ahmad, Smith and White for £3m in funding. Thisfunding would accelerate the completion of an integer-only microprocessor, theSPX256 and the follow-on CPU, the SPx384. The SPx256, a new product alreadyunder development, could be completed with £lm of the additional funding and madeavailable for volume shipment by the beginning of FY2023. The remaining £2m wouldbe spent during FY2023 and FY2024 to complete development and ready the SPx384for volume shipment by the beginning of FY2024.The SPx256, is a 256 MHz, 20 nanosecond CPU, manufactured like the SPx512, usingthe present 384-micron technology, but unlike the SPx512, the SPx256 does not havea floating-point processor. The elimination of the floating-point processor reduces thesize and power requirements of the CPU. The SPx256 and SPx384 can be packagedin a 168-pin grid array (PGA) that costs £15, that is £35 less than the 339 PGA usedby the SPx512. However, the testing parameters of the SPX256 and SPx384 aresignificantly different than for the SPx512 and require a Bonn tester, which MM&M doesnot currently own. This £2m tester, if purchased, will add £1.2m in annual depreciationand other direct operating costs, and £800,000 in incremental annual support costs tothe present level of manufacturing spending.The SPX256 and SPx384 are targeted as entry devices for AHS's personal computerbusiness. Top Telecommunication (TT) Plc, is the market leader in the 384-microninteger-only microprocessors. Their TT256 CPU (also 256 MHz, 20 nanoseconds)sells for £500. The TT256 has just been announced with volume shipments to coincidewith the beginning of UKM's FY2023. UKM's new marketing department estimates thedemand for the SPX256 from AHS and potential new external customers could easilyexceed 1,000 units per year. To break into this market, Sarah recommended heavymarket promotion and a price / performance two times the competitions. Estimates forunit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 forthe second £1,000 and over £l, m for a third million-£ advertising expenditure.With this increased pricing pressures from both AHS and the external marketplace,product cost reduction became critical. This fact, coupled with the request from product with the beginning of UKM's FY2023. UKM's new marketing department estimates thedemand for the SPx256 from AHS and potential new external customers could easilyexceed 1,000 units per year. To break into this market, Sarah recommended heavymarket promotion and a price / performance two times the competitions. Estimates forunit sales potential from advertising are 100,000 for the first £1,000, up to 500,000 forthe second £1,000 and over £l, m for a third million-£ advertising expenditure.With this increased pricing pressures from both AHS and the external marketplace,product cost reduction became critical. This fact, coupled with the request from productdevelopment for additional funding, had John English very concerned. He knew it wasimportant to bring out the SPX256 and SPx384 quickly, but the pricing pressures fortheir market entrance and the pricing pressures from AHS on the SPx512 seemedalmost impossible to meet and still achieve a profit in FY2023 and 2024. He knew,however, if he didn't maintain a profitable operation, his tenure would be short.Reduced product costs leading to competitive manufacturing appeared to be thecritical factor necessary to sustain UKM's slim profit levels. English asked Smith, thedirector of operations, to formulate a series of recommendations for developing andmanufacturing an expanded CPU product line in FY2023 and FY2024. He asked thatthe recommendations be completed by the annual two-year budget review, scheduledto commence in a month. English knew that soon after budget review he would haveto present a credible business plan to UKM management. He worried how he coulddevelop a viable plan in light of the obstacles.The Smith's planoductionsreductionSimon Smith started his preparation by reviewing the detailed SPx512 product cost(see TABLES below 1, 2 and 3). He immediately assembled a team comprising Whitefrom finance, T.Q. Marcel from quality and Dian Ruby from training. The team, led byMark Spencer, manager of wafer fabrication, conducted a cost review by activity.managerby activity.Simon, like John English, believed significant cost reductions would be necessary tomaintain profitability. He had recently taken an executive development course inactivity-based costing and knew was a proven method for better understandingcost structures and cost drivers, and highlighting non-value-added work. Smith wasuniveexcited, given the size of the assignment and his belief there were both cost reductionopportunities in manufacturing and necessary improvements in the current standardcost t system. HeHe felt the current standard cost system cdid not properly capture thecomplexity of UKM'sM's production process. He felt an ABC analysis could provide theinsight necessary to reduce the SPx512 product cost by the £166 marketing hadrequested. The team mapped the processes of the entire operation and thenreassigned costs to the newly defined activities. The manufacturing supportorganisations were also better understood. Their key activities were costed, and theneach was aligned to the manufacturing operation it supported. UKM's ABC team resetthe SPx512 product cost in line with the true practical capacity of the manufacturingprocess. The team saw capacity utilisation as a major driver of product cost. The oldproduct costing methodology was based on the planned utilisation of eachmanufacturing process with underutilised manufacturing costs absorbed into productcosts.The revised SPx512 product cost was pleasing, but not very surprising to Smith. Itconfirmed his belief in the inaccuracies of the old costing method. The new SPX512product cost of £437.50 was £227.61 lower than the £665.11 original cost shown bythe old system. It did not make sense to charge the SPx512 for the costs of resourcesit did not consume. Smith felt he could commit immediately to Sarah's 2023 productcost reduction request of £166.To achieve the 2024 product cost goal of £332.50, Smith and his team looked furtherinto the activity-based costing results. The study clearly showed that wafer fabricationwas the largest area of manufacturing cost. Smith computed that if the SPx512 wafercost was reduced from the 2023 level of £3,000/wafer to £1,866/wafer, the SPx512total product cost would be lowered by £105, achieving the desired £332.50. To obtaina wafer cost of £1,866, spending reductions of -£25.5m or 38 per cent in wafer

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Internal and External IssuesInternal issues: These are challenges or factors within the organization…