A sports good manufacturer in conjunction with a
software house, is considering the launch of a new sporting
simulator based on video tapes linked to a personal computer
enabling much greater realism to be achieved.
Two proposals are being considered. Both use the same production
facilities and as these are limited, only one product can be
launched.
The following date are the best estimates the firm has been able to
obtain:
Foot ball
simulator
Cricket simulator
Annual
volume(units)
40,000
30,000
Selling
price
£130 per
unit
£200 per unit
Variable production
costs
£80 per
unit
£100 per unit
Fixed production
costs
£600,000
£600,000
Fixed selling and
Administrative
costs
£450,000
£1,350,000
The higher selling and administrative costs for the cricket
simulator reflect the additional advertising and promotion costs
expected to be necessary to sell the more expensive cricket
system.
The firm has a minimum target of £200,000 profit per year for the
new products. The management recognises the uncertainty in the
above estimates and wishes to explore the sensitivity of the profit
on each product to changes in the value of the variables (volume,
price, variable cost per unit, fixed costs).
Required
a) To calculate the expected profit from each product. (4
Marks)
b) To calculate the critical value for each variable (i.e the value
at which the firm will earn £200,000), assuming that all other
variables are expected (express this as an absolute value and as a
percentage change from the expected value.); (3 Marks)
c) To discuss the factors which should be considered in making a
choice between the two products.
The following is the data given with respect to sales of Football and cricket simulator
Particulars | Foot ball simulator | Cricket simulator | |
Annual volume(units) | 40,000 | 30,000 | A |
Selling price | £130 per unit | £200 per unit | B |
Variable production costs | £80 per unit | £100 per unit | C |
Fixed production costs | £600,000 | £600,000 | D |
Fixed selling and Administrative costs | £450,000 | £1,350,000 | E |
a) The following table gives computation relating to the expected profit from each product.
Particulars | Foot ball simulator | Cricket simulator |
Total sales (A*B) | 5,200,000 | 6,000,000 |
Total variable production costs (A*C) | (3,200,000) | (3,000,000) |
Fixed production costs | (600,000) | (600,000) |
Fixed selling and Administrative costs | (450,000) | (1,350,000) |
Expected profit from each sale (sum of all variables above) | 950,000 | 1,050,000 |
b) The following table gives critical value for sales volume, sales price, variable production price
Critical value for sales units | ||
Particulars | Foot ball simulator | Cricket simulator |
Margin per unit (B-C) | 50 | 100 |
No. of units to be sold to make a minimum of 200,000 profit will be (Fixed production costs+Fixed selling and Administrative costs+200000)/Margin per Unit (F) | 25000 | 21500 |
No, of units change from current volume of sales (G=A-F) | 15000 | 8500 |
percentage change from the expected value (G/A)*100 | 37.50% | 21.25% |
Critical value for Selling price, variable production costs | ||
Particulars | Foot ball simulator | Cricket simulator |
Amount by which profit should come down to reduce profits to 200,000 (expected profit from each sale-200,000) (H) | 750,000 | 850,000 |
Amount by which sale price should decrease / costs to increase will be I=(H)/A | 18.75 | 28.33 |
percentage change from the expected value for sales price I/B | 14.42% | 14.17% |
percentage change from the expected value for variable production costs I/C | 23.44% | 28.33% |
Critical value for Fixed production costs, Fixed selling and Administrative costs |
Particulars | Foot ball simulator | Cricket simulator |
Amount by which profit should come down to reduce profits to 200,000 (expected profit from each sale-200,000) (H) | 750,000 | 850,000 |
percentage change from the expected value for fixed production costs I/D*100 | 125.0% | 141.7% |
percentage change from the expected value for fixed selling and admin costs I/E*100 | 166.7% | 63.0% |
C) Football simulator sales provides better margin of safety in terms of volume of sales as volume here has to go down by 37.5% when compared to Cricket simulator 21.25%
In terms of fixed selling costs also football simulator offers better margin of safety as costs here should go up up by 167% while for cricket simulator its 63%
In terms of variable production costs cricket simulator offers better margin of safety as costs here should go up up by 28.33% while for footbal simulator its 23.44%
A sports good manufacturer in conjunction with a software house, is considering the launch of a...
A sports good manufacturer in conjunction with a software house, is considering the launch of a new sporting simulator based on video tapes linked to a personal computer enabling much greater realism to be achieved. Two proposals are being considered. Both use the same production facilities and as these are limited, only one product can be launched. The following date are the best estimates the firm has been able to obtain: Foot ball simulator Cricket simulator Annual volume(units) ...
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