Question

Read the following information carefully and answer questions below.

In late September 2017, Apple Inc. (NYSE: AAPL) announced that it would be releasing three new models of its iPhone in the fourth quarter of 2017: the iPhone X, the iPhone 8 Plus, and the iPhone 8. In addition, it would continue to sell some of the older models.

To follow is a table containing price and cost estimates for the current three new iPhone models plus one older model. The estimated direct materials costs were developed by IHS Markit and Susquehanna International Group. Other listed costs and data are assumptions.

	iPhone X	iPhone 8 Plus	iPhone 8	iPhone 7	Fixed costs
Sales price (base models)	$        999	$        799	$        699	$        649
Estimated direct materials (from IHS Markit and Susquehanna International Group)	581	288	248	248
Estimated direct labor (assembly and testing)	8	5	5	5
Estimated retail packaging and shipping to warehouses/stores)	5	4	4	4
Total variable costs	594	297	257	257
Contribution margin per phone	$        405	$        502	$        442	$       392
Minutes of skilled labor required for assembly	7	5	4	3
fixed cost					$500,000

Questions

1. Which iPhone model is the most profitable for Apple? Which metric are you using to gauge profitability? Defend your choice of metric.
2. Assume that Apple has unlimited demand for every iPhone model. Which model should it emphasize to maximize profits if skilled labor is a scarce resource?
3. Why might Apple offer several iPhone models rather than just the one most profitable model?
4. What is the breakeven point for each product? Assume that Apple total sales of each product are 120,000, 80,000, 60,000, 40,000 respectively.
5. Make at least three visuals that would help you to communicate your answer to your manager. Use excel or Power BI to prepare your visuals. Note: In Power BI, you need to create a flat table using the information above.

Answer 1

Ans.1. As per the data provided, iPhone 8 plus is the most profitable out of the four phones because it has the highest contribution margin per phone. Contribution margin is the excess of total sales over total variable costs, so it represents the amount left over for coverage of fixed costs and balance as profits.

Since iPhone 8 plus has the highest contribution margin per phone of $502 per phone, it will cover fixed cost of $500,000 better than other phones (based on number of units sold) thereby leaving more profits.

Ans.2. If labor is a scarce resource, we need to select the model with least minutes of skilled labor required for assembly. So, we should focus on iPhone 7.

Ans.3. We can see from the table below that iPhone 8Plus, iPhone 8 and iPhone7 have similar contribution margin ratios at different price points. So, the Company should sell mix of all these three to capture a larger audience (price range-wise) with each phone type providing above 60% contribution margin.

	iPhone X	iPhone 8 Plus	iPhone 8	iPhone 7
Sale price	999	799	699	649
Contribution margin per phone	405	502	442	392
Contribution margin ratio	40.54%	62.83%	63.23%	60.40%

Ans.4. Break-even point (in units) = Fixed cost / (Sales price per unit – Variable cost per unit)

Break-even point (in dollars) = Fixed cost / Contribution margin ratio

	iPhone X	iPhone 8 Plus	iPhone 8	iPhone 7
Sale price per unit	$999	$799	$699	$649
Total variable cost per unit	$594	$297	$257	$257
Contribution margin per unit (Sale price per unit - Variable cost per unit)	$405	$502	$442	$392
Contribution margin ratio	40.54%	62.83%	63.23%	60.40%
B.E.P. (units)	1235	996	1131	1276
B.E.P.(dollars)	$1,233,333	$795,817	$790,724	$827,806