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.
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 |
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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