Deere Case

The gatherer chain is selling for less and costing more, putting a squeeze on the margins at Deere. The supplier, Saunders, is likely increasing prices to Deere to help cover fixed costs in the face of declining demand, as revenue to Saunders from Deere has declined 16.3% even with the price increases.

For Saunders, variable costs of production are $12.43 per unit based on last year's figures; indirect labor is $1.36 and overhead allocation is $4.52, with profit of $4.29 per unit. If Deere wants to stick to a 50/50 split, it needs to buy from Saunders at $15. This would leave Saunders with $2.57 (profit margin = 20.67%) once direct costs are excluded, and that would go towards Saunders' profit but not indirect cost and overhead allocations. It is reasonable to argue that overhead allocations and indirect costs should be incorporated into the profit margin that Saunders...
[ View Full Essay]