Question

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.

Answer 1

		FOOT BALL SIMULATOR	CRICKET SIMULATOR
	ANNUAL VOLUME	40000	30000
	SELLING PRICE	130	200
	VARIABLE PRODUCTION COST	80	100
	FIXED PRODUCTION COST	600000	600000
	FIXED SELLING AND ADMINISTRATIVE COST	450000	1350000
	EXPECTED PROFIT	200000	200000
1	INCOME STATEMENT OF PROJECTS
		FOOT BALL SIMULATOR		CRICKET SIMULATOR
		PER UNIT	TOTAL	PER UNIT	TOTAL
	SALES	130.00	52,00,000.00	200.00	60,00,000.00
	VARIABLE PRODUCTION COST	80.00	32,00,000.00	100.00	30,00,000.00
	CONTRIBUTION	50.00	20,00,000.00	100.00	30,00,000.00
	FIXED PRODUCTION COST		6,00,000.00		6,00,000.00
	FIXED SELLING AND ADMINISTRATIVE COST		4,50,000.00		13,50,000.00
	PROFIT		9,50,000.00		10,50,000.00
2	AT 2,00,000 PROFIT, CALCULATE SALES VOLUME
	SALES = CONTRIBUTION/CONTRIBUTION PER UNIT
	CALCULATION OF SALES VOLUME
		FOOT BALL SIMULATOR	CRICKET SIMULATOR
	PROFIT	2,00,000.00	2,00,000.00
	FIXED PRODUCTION COST	6,00,000.00	6,00,000.00
	FIXED SELLING AND ADMINISTRATIVE COST	4,50,000.00	13,50,000.00
	CONTRIBUTION	12,50,000.00	21,50,000.00
	CONTRIBUTION PER UNIT	50.00	100.00
	SALES VOLUME	25,000.00	21,500.00
	CHECK
	INCOME STATEMENT OF PROJECTS
		FOOT BALL SIMULATOR		CRICKET SIMULATOR
		25000 UNITS		21500 UNITS
		PER UNIT	TOTAL	PER UNIT	TOTAL
	SALES	130.00	32,50,000.00	200.00	43,00,000.00
	VARIABLE PRODUCTION COST	80.00	20,00,000.00	100.00	21,50,000.00
	CONTRIBUTION	50.00	12,50,000.00	100.00	21,50,000.00
	FIXED PRODUCTION COST		6,00,000.00		6,00,000.00
	FIXED SELLING AND ADMINISTRATIVE COST		4,50,000.00		13,50,000.00
	PROFIT		2,00,000.00		2,00,000.00
3	FACTORS IMPORTANT FOR PROJECT SELECTION
	1. FIXED COST OF PROJECT
	2. VARIABLE COST OF PRODUCT
	3. SALES VOUME OF PRODUCT