Question

PROBLEM 4: Cost Volume Profit In the Face of Uncertainty A niche server manufacturer (the Company) is exploring changing its manufacturing practice. Its current product, DX38 is priced at $100. If demand picks up, it can raiso prices, but competition may cap its ability of how much. Sales are expected to be 150,000 units for next year. Currently, the Company leases plant from IIP using some of their equipment. The Company manufactures about 70% of the parts of this circuit board. It is considering a significant reengineering project to change the plant and manufacturing process. The project's objective is to increase the number of purchased parts (to about 55%) and reduce complexity of the process. This would enable the company to remove some leased equipment and to sell some of the most expensive equipment in the Plant. The per-unit manufacturing costs for 150,000 units for DX38 are as follows: Current Manufacturing Costs Proposed Manufacturing Costs Materials & purchased parts $6,00 $15.00 Direct Labor $12.50 $13.75 Variable Overhead $25.00 $30.00 Fixed Overhad $40,00 S20.00 Inſo. On DX38 Setups 3.000 2.300 Balch size 50 SO Cost per Setup $300 S300 Maching Hours 88,000) 55.000 There are $70 unit commission costs and $7.25 million fixed costs for SC164. These costs will remain under both circumstances. Your client has asked you for the following: i. Contribution margin per unit current vs proposud? ii. At what level of unil sales would the Company be indifferent to the alternatives. iii. What is the Company's strategy & what does your team recommend it should be? (Support wiany external research on server pricing and demand) iv. Should the Company undertake the reengineering? Support your answer using sensitivity analysis. 2,0 page limit

Answer 1

NO Ana Repased Cruent Unt ale price variae conts rderial pnad p6 Direc labor con 1-50 13 75 Veiable ovehead o 35 Commiusion To tal variable cor 68-75 53.50 Contmi butien mangin 46.50 3 QS Cewracnt eoven head 150,000 x 40 6o00,000 aso.000 GA - £7250000 lotal xed coof 6000000 lasoo0o 11

NOQ ftued overheod 50000 x0 3000,000 SG& A 1250,000 3000000 l250000 050,000 fahe, derent fovel of tales Pro 46. O N 4Q5000 O 31S N 250000 46-50-31-5N 7aso00O Rsoo00 3000000 196 2.2ndifronen fevel f calesN 961) Company ate o eras prtyreduchon of firzedcoak

NO iv Yes, e company hod ndarbahke eenainecaing Pritoith Crcnt mehed= 46-5 N 7250C0 O Profit oiR proposed methoo - 31'dsN - 4fo00o Rofit saith woent met t pops meh ^260000 0 -9500 l00,000 35,006 - 4 a45000 150,000 43500 65000 422500 906a50 200,000 2000000 20S0,000