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Yash Vazirani and Hassaan Joosub GB 202
Yash Vazirani and Hassaan Joosub GB 202
Cost Structure A Cost Type Portion of cost (in $$) that is:
FIXED VARIABLE
Administration x 315,000
Direct labor x 20
Direct materials x 15
Machine rental x 50
Marketing x 500,000
support staff 15
Question 1:
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
Cost Structure B Cost Type Portion of cost (in $$) that is:
FIXED VARIABLE
Administration x 320,000
Direct labor x 40
Direct materials x 15
Machine rental x 0
Marketing x 500,000
support staff
Question 1 Continued:
Question 2:
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
4,000,000
2,000,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000
Output (units)
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
12,000,000
10,000,000
Total cost B
8,000,000
Total revenue B
Dollars
2,000,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000
Output (units)
Question 3:
Check
Cost Structure A
Sales 3,578,947.37
Contribution margin = $400-$210 - $190
Variable Cost -1,878,947.37
Breakeven volume = Fixed costs/ Contribution margin Contribution Margin 1,700,000
Breakeven volume in units = $1,700,000/190 = 8,947.37 units Fixed Costs -1,700,000
Sales 4,857,142.86
Net Income 0
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
Question 4:
Cost Structure A
Cost Structure B
Question 5:
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
Structure B would be adopted by the company, assuming that it is heading in the direction
of profit maximization. Taking into account that the marketing department is almost 100%
certain that the Apex will sell between 3,000 - 40,000, irrespective of the cost structure; the
logical choice is the cost structure favoring fixed costs. As we already know, the more fixed
costs, the more unstable net come is. The operating leverage of Structure B is 35, in comparison
to the leverage of only 3.52 in Structure A, thus Structure B’s net income will increase 35 times
proportionately to sales.
On the flip side, there are a few risks. Choosing Structure B means that the operating
leverage behaves consistently with a decrease in sales. For example, when Apex produces 5,000
units, a figure within the range of the company’s predictions, it could stand to lose $2,25
million. Therefore, to effectively operate at this cost structure, the company most produce a
moderate 12,143 units and spend $4,857,142.90 in order to break-even and eventually earn
profit.
Utilization of a variable cost structure, as opposed to a fixed one does indeed reduce risk;
however, it also reduces the potential to earn profits. A variable cost structure would perhaps
be more suited in a scenario where future prospects are uncertain and maybe the manager is
expecting a decline in revenue. In the earlier operations of Apex, it would seem that the total
costs in contrast with revenues would be producing little, if no profit at all. However, when the
company matures in the near future, under the operating conditions of Structure B, producing
30,000 units could earn a profit of $5,625 million, compared to Structure A’s profit of only $4
million.
Yash Vazirani and Hassaan Joosub
GB 202 Project – Part 1
Question 6:
If Apex were to increase their marketing costs and spend $425,000, their sales would
subsequently increase and there is a 95% chance that the company will sell between 8,000 and 33,000
units. Without the additional spending on marketing, the company had a 95% confidence of selling
between 4,000 and 30,000 units. In the last question, we concluded that Structure B is the riskier choice
but it could potentially be highly profitable with increased sales. Since the spending on marketing will
increase sales substantially, we recommend that the company switch to Structure B and spend the
Without the additional spending, the company was projected to sell between 4,000 and 30,000
units. The mean of this range is 17,000 units. In that case, Structure A would be much easier to attain for
a new company since the break-even point under that structure was only 8,947 units and the company
would have easily surpassed that figure since it would only have to obtain about half the sales of the
mean of the range. On the other hand, the break-even point for Structure B was 12, 142 units. For a new
small company, it would be difficult to meet the sales needed to reach the break-even point and
although the profits would have been greater with higher sales, the risk of loss was also much higher.
With the additional spending on marketing, the mean of the range is 20,500 units and we believe that
based on this mean, it is highly likely that the company will reach the new break-even point. The new
break-even point for Structure A is 11,184 units ((1,700,000+425,000)/190) and the new break-even
point for Structure B is 13,492 ((3,825,000+425,000)/315). Although the break-even point for Structure B
is still higher, it is highly likely that the company will reach this goal since it is only about 2/3 of the mean
of the range.