'Ace Manufacturing Essay\r'

'Of all the topics in this course, many students find Lesson 4 to be the most frustrating. I think this may be due in part to an app bent contradiction: thither are lots of numbers and equations to work with, besides amazingly little certainty in our conclusions. I piece your frustrations at times. Fortunately, these baptismal fonts are the only â€Å" purely pecuniary” case studies … the only superstars where number crunching is an end unto itself. However, prefatorial financial analytic thinking will always be an important part of our toolkit for making pricing decisions.\r\nThe catalogue which follows contains the â€Å" answers” to these both case study assignments: Ace Manufacturing and thinking(a) Spring Water. Despite the financial emphasis, they are akin(predicate) to the previous cases insofar as they’re by choice open-ended and somewhat vague to encourage you to attractive force out all of the contingencies and factors that need to b e considered. They’re intended to stimulate thinking. If you feel a cow dung frustrated by that, it probably means they’re working. Only after you’ve identified the issues and concepts that are pertinent to the questions fucking you start to focus your efforts on how to act the problem.\r\nThis is my answer key (of sorts) for the two assigned cases. I know how much many of you struggled with this case and your efforts were non in vain. Having had to slog through all of the conflicting complexities of financial analysis is necessary to fully prepared you for what may lie ahead in your master copy endeavors.\r\nAce Manufacturing\r\n1. What is the relevant unit represent for making this pricing decision? There are two primary secondarys that you might consider when approaching this question. Those of you who attain this type of responsibility in a â€Å" realistic world” context are likely to hint that fixed be and G&A be should be allocate d equally/proportionately crossways the two products. At the opposite extreme, you might pick out chosen to argue that the redundant 30,000 units should only be demand to cover the incremental be incurred … implying a relevant unit cost of $7.50. Is one(a) of these approaches â€Å" remedy” or â€Å"more correct” than the former(a)? Is one of them more realistic? More conservative? Is one approach more courtly … and does being â€Å"conventional” mean it is correct?\r\nArguing persuasively for every position … or a compromise date in between the two … has some merit. And … I’ll certainly try to be honest in evaluating your work, but I have a deflect toward being both conservative and coldly realistic. here’s my thinking … building the units requires using designs that cost money to build and tooling that the company borrowed money to purchase. These are require fixed costs. They also require victual s of the plant which is currently being covered by the first 150,000 units. Since incurring these costs is necessary to producing the supernumerary 30,000 units, why shouldn’t the additional 30,000 units be required to cover a fair share of the costs? That leaves the $60,000 increase in General and Administrative be associated with the innovative production … which I would treat in the same way as the increases in direct fixed costs.\r\nDoes all of this â€Å"squabbling” about how and where to allocate costs make a difference? It makes a good- looking difference in evaluating the profitability of pursuing this new enumerate.\r\n2. Is this business sufficiently lucrative to make statement worthwhile? Although there can be a few subtle variations on this analysis, here’s the way that the two alternative approaches to allocating costs hesitate down:\r\nOne approach (Plan A) yields a profitable outcome … $2.50 per incremental unit. The other, a l oss of $1.25 per incremental unit. When you look at the total dollars columns, however … either scheme generates the same level of profitability †a net gain of $75,000.\r\nConfused? The notion of the incremental units covering their â€Å"fair share” of fixed costs shows a net loss resulting from this additional business, but you can’t argue with the total dollars outcome. opus the additional units don’t cover their â€Å"fair share” of costs, they contribute $75,000 toward these costs †costs that would not have been covered by the original 150,000 units. In this situation, the concepts of fairness and conventional practice could obscure a profitable opportunity.\r\nBased on the financial analysis alone, the company should definitely take the new business. What other considerations are relevant? Well … is there a potential downside in terms of â€Å"indirect” cannibalization and cost erosion? There’s always the Walmar t accomplishment to worry about … that if you sell an â€Å"incremental record” of goods at a discount through an alternative channel, buyers may switch channels †and 10,000 units sold at discount will cannibalize 10,000 units in gross revenue at higher margins.\r\nAnother concern is that potential buyers will use the lower-priced â€Å"inferior” product as leverage in negotiating the price of the better product. raze slight price reductions in the 150,000 of regular gross revenue would wipe out any profitability gains from additional sales of the inferior product.\r\nA simple case study … and two short questions. But appearances can be deceiving.\r\nFor grading purposes, I’m looking for a thoughtful analysis of the situation … a recognition that there’s more here than crunching a few numbers. A â€Å"bad answer” would be one that rejects the possibility of pursuing this account without recognizing that it is a profitable venture from a strictly financial perspective.\r\n'