1. Homer Simpson gets a monthly salary of $90, which he spends on donuts and other goods. The donut store charges a price of $3 per donut.

1. Homer always consumes donuts with other goods – 2 units of other goods with 1 donut. Show the indifference map of Homer and determine his best affordable bundle. Briefly explain your method. (5 points)
2. The donut store changes its pricing policy. For the first 10 donuts, the price is still $3, but it is $2 per donut for purchases more than 10 donuts. Draw the budget line of Homer. Show the affordable set. Briefly explain your method. (5 points)

A- The following details relate to ready meals that are prepared by a food processing company:

Required:

Show which ready meal is the most profitable for the company as per contribution per limiting factor? (Per minute). Comment on the results.                                                           

B-

AAACompany has estimated the following for the year 2019 for one of its products.

(i) Sales Estimations

(ii) Inventory estimations

• Beginning inventory for first quarter: 200 units
• The company desires to have an ending inventory each quarter equal to 30% of the next quarter’s sales.
• The first quarter’s sales for the following year 2020 is expected to be 1,700 units.

Required:

Prepare the Sales Budget andthe Production Budget for 2019.                                    

C-

The following information has been take from a manufacturing company for the year 2019:

Sales revenues 36,000 – opening inventory of materials 10,000 – closing inventory of materials 8,000 – opening inventory of finished goods 6,000 – closing inventory of finished goods 4,000 – cost of goods produced 26,000

Required: calculate Cost of goods sold and gross profit for the year ended December 31, 2019.             

An automobile manufacturer is considering one of two systems for its windshield assembly line. The first is a robotic system that should save money due to a reduction in labor and material cost. This robotic system will cost $400,000. Current practice is to recover this cost over the first two years. One full-time technician and one full-time material handler will be needed with this system. The full-time technician costs $60,000 per year and the material handler costs $52,000 per year.

If the company selects the manual system, it will need four full-time material handlers at a cost of $52,000 each per year. If the manual system is selected, the company will incur additional costs of $0.50 per windshield installed. (Hint: This is the savings referred to in the first paragraph.)

Q.1) Suppose that the company is going to produce 9,000 windshields per month. How much would the robotic design have to save per unit in order for the company to be indifferent between the two design options?

Q.2) For the manual design and with the current price of $9.50 per unit, the marketing group has said that there is a demand for 8,000 units per month. However, if the company were to drop the price by $0.25 per unit and adopt the robotic design, the demand would increase to 9,000 units per month. The other information for the robotic design is provided in a) above. Looking at these two options, which strategy should the company adopt? All of the other information provided in part a) applies in this analysis. Show your work supporting your decision.

QUESTION 1

Shannon’s Irish Red averages on premise sales of 1,200 pints per month. What is the anticipated profit (contribution dollars) per month associated with sales of Shannon’s Irish Red assuming that the Irish Stout is not introduced. Express your answer to the nearest dollar. Do not include the dollar sign.

QUESTION 2

Assume that Shannon’s estimates that the sales of the new Irish Stout will be about 250 pints per month, but 0.25% of these sales will be cannibalized from sales of Shannon’s Irish Red. Compute the contribution dollars expected with the introduction of the Irish Stout. Express your answer to the nearest dollar. Do not include the dollar sign in your answer.

QUESTION 3

Let’s stretch a little on this one. Assume Shannon’s Irish Red sells 1,000 pints per month in the absence of any cannibalization. Assume also that the new Irish Stout will sell 500 pints per month. The relevant price and cost data are:

What will be the maximum percentage cannibalization that can exist before the overall change in contribution dollars becomes negative? Express your answer in percentage form to the nearest percent e.g.; 99.49% rounds down to 99%; 99.50% rounds up to 100%. Do not include the % symbol in your answer.

Keeping Score: Financial Analysis and Performance Metrics

Cannibalization Analysis

What is Cannibalization?

Cannibalization results when the sales of a new product in part come from sales taken away from other products sold by that firm. Cannibalization most commonly occurs when a firm introduces a new flanker brand or line extension into the same product line in which it already has brand representation. For example, when Proctor & Gamble introduces a new brand of laundry detergent into its extensive line of detergents, some sales for the new brand will highly likely come at the expense of one or more of P&G’s existing brands of laundry detergent. In other words, the sales of P&G’s existing brand of laundry detergents will be cannibalized to support sales of the new brand.

The effects of cannibalization can be good or bad, depending on the overall effect on profitability for both the new brand and the cannibalized brands. Determining the effects on profitability are relatively easy. Let’s examine a simple example of how it works. Assume two brands of mouthwash produced by the same firm (P&G?). Relevant price and cost data for these brands are below. Brand A is currently sold at $1.00 per unit with associated variable costs per unit of $.60. Brand B, the new brand to be introduced, sells for a little less, say $.95 per unit. Its costs per unit are the same as for Brand A i.e. $.60 per unit. Note that the resulting unit contribution for Brand B (price minus unit variable costs) is $.35 which is $.05 less than the unit contribution for Brand A. This means that for each unit of Brand A that is cannibalized by Brand B, the firm loses $.05 in contribution.

Assume that management anticipates that when Brand B is launched, 20% of its sales will come from sales that would have been for Brand A. In other words, 20% of Brand B’s sales will be cannibalized from the sales of Brand A. The net effect of this cannibalization on profits is easily found by comparing the contribution (gross profit) assuming Brand B is not launched (and therefore no cannibalization occurs) with the contribution (gross profit) expected from the launch of Brand B with the expected level of cannibalization.

Here is how the analysis proceeds. First, compute the expected contribution from the sales of Brand A with no cannibalization (i.e. Brand B is not launched). Assume that Brand A’s sales without the introduction of Brand B are expected to be 1,000 units. Since the unit contribution for Brand A is $.40 per unit, the overall resulting contribution (gross profit) will be 1,000 x $.40 = $400.00. Easy!

Next, compute the expected contribution dollars assuming that Brand B is launched and the expected level of cannibalization occurs. Here is how this part proceeds. Assume that Brand B is expected to sell only 500 units initially and that 20% of these sales will come from Brand A (i.e. 20% of 500 equals 100 units that will be cannibalized from Brand A.). The table below summarizes the computations. Since 100 units will be cannibalized from Brand A’s sales, the brand will now sell only 900 units. Since the profit per unit (unit contribution) is $.40, the resulting total contribution dollars from the sales of Brand A will be 900 x $ .40 = $360.00. Brand B is expected to sell 500 units in total, with 100 of these units being cannibalized from Brand A. Therefore, Brand B’s contribution dollars will be 100 units x $.35 = $35.00 plus 400 units x $.35 = $140.00 for an overall contribution of $535.00.

The net change in contribution dollars if Brand B is introduced is $535 - $400 = $135. Thus, contribution dollars are expected to increase by $135 with the addition of Brand B to the product line of mouthwashes. Should the new brand be launched? The answer is clearly YES. Had overall contribution dollars declined due to cannibalization then the decision would have been NO.

You should also be aware by now that cannibalization will only be problematic, potentially reducing dollar contribution, if the unit contribution for the new product is less than the unit contribution for the old product. The greater the difference between the unit contributions the greater the impact will be of any cannibalization of the old brand by the new brand. You can verify this for yourself if you have built a spreadsheet to run your calculations.

Now It’s Your Turn. Show Us What You Have Learned.

Returning to our running case for Shannon’s Brewery introduced in the market share exercise, assume that Shannon’s is considering the introduction of a new craft beer called Irish Stout that will be derived from its award winning Irish Red. Initially, Irish Stout will only be sold “on premise” at the brewery. Currently, pints of Irish Red consumed on premise sell for $5.00 per pint with unit variable costs of approximately $2.75 per pint. Variable costs are predominantly comprised of the costs of ingredients and utilities that directly affect the brewing process. The new craft beer will be positioned at a slightly higher price, $5.25 per pint and its unit variable costs will be about $3.25 due to the higher cost of some ingredients. The relevant price, cost, and margin data are below.

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Question 1

Shannon’s Irish Red averages on premise sales of 1,200 pints per month. What is the anticipated profit (contribution dollars) per month associated with sales of Shannon’s Irish Red assuming that the Irish Stout is not introduced. Express your answer to the nearest dollar. Do not include the dollar sign.

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Question 2

Assume that Shannon’s estimates that the sales of the new Irish Stout will be about 250 pints per month, but 25% of these sales will be cannibalized from sales of Shannon’s Irish Red. Compute the total combined increase in contribution dollars for both Irish Red and Irish Stout expected with cannibalization . Express your answer to the nearest dollar. Do not include the dollar sign.

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Question 3

1. Let’s stretch a little on this one. Assume Shannon’s Irish Red sells 1,000 pints per month in the absence of any cannibalization. Assume also that the new Irish Stout will sell 500 pints per month. The relevant price and cost data are:

What will be the maximum percentage cannibalization that can exist before the overall change in contribution dollars becomes negative? Express your answer in percentage form to the nearest percent e.g.; 99.49% rounds down to99%; 99.50% rounds up to 100%. Do not include the % symbol.

Financing Analysis

In order to launch the new gadget line, Acme is securing investor financing to cover the first year of fixed costs from private investors. A first private investor is willing to loan Acme the funds needed to cover the fixed costs associated with producing the chosen gadget to be paid back over 12 equal payments, with a fixed cost of borrowing of $1,350,000; that is, the lender will charge a fixed dollar amount of $1,350,000 for the loan regardless of the principle borrowed. A second investor is willing to loan the money under a simple interest payment plan of 2.5% interest but requires the loan be repaid in 6 months. Given that Acme will have to borrow Y dollars, provide Acme with a detailed comparison of the financing options and determine how each impacts the breakeven analysis below.

Breakeven analysis

The following Cost and Sales projections were captured by the Acme’s production and Sales/Marketing teams.

Table : Projected costs

Table : Projected sales

Run a break-even analysis using the information captured in projected costs and revenues tables and any relevant information from your production, pricing and financing analyses.

Financing Analysis

In order to launch the new gadget line, Acme is securing investor financing to cover the first year of fixed costs from private investors. A first private investor is willing to loan Acme the funds needed to cover the fixed costs associated with producing the chosen gadget to be paid back over 12 equal payments, with a fixed cost of borrowing of $1,350,000; that is, the lender will charge a fixed dollar amount of $1,350,000 for the loan regardless of the principle borrowed. A second investor is willing to loan the money under a simple interest payment plan of 2.5% interest but requires the loan be repaid in 6 months. Given that Acme will have to borrow Y dollars, provide Acme with a detailed comparison of the financing options and determine how each impacts the breakeven analysis below.

Breakeven analysis

The following Cost and Sales projections were captured by the Acme’s production and Sales/Marketing teams.

Table : Projected costs

Table : Projected sales

Run a break-even analysis using the information captured in projected costs and revenues tables and any relevant information from your production, pricing and financing analyses.

Sugar Land Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space in Sugar Land’ main plant. Total cost of the machine is $260,000. The machinery has an economic life of 4 years, and MACRS will be used for depreciation. The machine will have a salvage value of 40,000 after 4 years.


The new line will generate Sales of 1,350 units per year for 4 years and the variable cost per unit is $100 in the first year. Each unit can be sold for $200 in the first year. The sales price and variable cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm’s net working capital would have to increase by $30,000 at time zero (The NWC will be recouped in year 4). The firm’s tax rate is 40% and its weighted average cost of capital is 10%.

1. What are the annual depreciation expenses for years 1 through 4? (10 Points)

2. Calculate the annual sales revenues and costs (other than depreciation), years 1 through 4. (10 points)

3. Estimate annual (Year 1 through 4) operating cash flows (40 points)

4. Estimate the after tax salvage cash flow (10 points)
5. Estimate the cash flow of this project (10 Points)

6. Estimate the NPV, IRR, MIRR, and profitability Index of the project. (20 points)

1. On one set of axes, draw a single concave production frontier with two different community indifference curves tangent to the single production frontier, on the assumption that two nations are identical in production but have different tastes. Indicate on your figure the autarky equilibrium-relative commodity price in each nation and show the process of specialization in production and mutually beneficial trade. 2. Answer the following questions: (a) What does the factor-price equalization theorem postulate? (b) What does the Stopler-Samuelson theorem postulate? (c) What is the Leontief paradox? How was the paradox resolved or explained? (d) How do different environmental standards affect industry location and international trade? 3. Figure 4.3 shows how transportation costs reduce the volume of trade. It shows what happens to the production and the consumption of X in two nations under (1) autarky, (2) trade with no transportation costs, (3) trade with transportation costs of $2 per unit. Find the consumption, production, prices, exports and imports in two nations when transportation cost is $4 per unit. 4. Suppose that the small nation in page 12 of the lecture slide imposed a 100% ad valorem tariff instead of a 50%. The international price of is $20. The supply and demand curves are as following: Q d = 100 − P Q s = P (a) Find the level of consumption, production, imports, and tariff revenue of commodity X. (b) Find the consumption, production, trade, and revenue effects of the tariff (for example, the difference between the consumption level in free trade and the level after the imposition of the tariff) 5. Read the attached article “The Prize in Economic Sciences 2008” and briefly explain (1) the difference between “traditional theory of international trade” and “new theory of international trade”, and (2) the contribution of Paul Krugman to economic geography

Comprehensive variance analysis review. Ellis Animal Health, Inc., produces a generic medication used to treat cats with feline diabetes. The liquid medication is sold in 100 ml vials. Ellis employs a team of sales representatives who are paid varying amounts of commission.

Given the narrow margins in the generic veterinary drugs industry, Ellis relies on tight standards and cost controls to manage its operations. Ellis has the following budgeted standards for the month of April 2017:

Ellis budgeted sales of 700,000 vials for April. At the end of the month, the controller revealed that actual results for April had deviated from the budget in several ways:

¡    Unit sales and production were 90% of plan.

¡    Actual average selling price decreased to $8.20.

¡    Productivity dropped to 90 vials per hour.

¡    Actual direct manufacturing labor cost was $15.20 per hour.

¡    Actual total direct material cost per unit increased to $3.90.

¡    Actual sales commissions were $0.70 per vial.

¡    Fixed overhead costs were $110,000 above budget.

Using EXCEL, calculate the following amounts for Ellis for April 2017:

1.   Static-budget and actual operating income

2.   Static-budget variance for operating income

3.   Flexible-budget operating income

4.   Flexible-budget variance for operating income

5.   Sales-volume variance for operating income

6.   Price and efficiency variances for direct manufacturing labor

7.   Flexible-budget variance for direct manufacturing labor