You are an economist for the Vanda-Laye Corporation, which produces and distribu
ID: 1115684 • Letter: Y
Question
You are an economist for the Vanda-Laye Corporation, which produces and distributes outdoor cooking supplies. The company has come under new ownership and management and will be undergoing changes in its product lines and operating structure. As an economist, your responsibilities include examining the market factors that affect success or failure of a product, including the supply and demand for the product, market conditions, and the behavior of competitors with similar products. The new owners are evaluating the operating structure, and you have two possible alternatives. One alternative requires a high level of investment in fixed costs compared to the other alternative. Jorge, your supervisor, has assigned you the task of evaluating the two alternatives. Assume that the company has no debt. Regardless of the alternative selected, market conditions will require the selling price of the product to be $3.45 per unit. The details for each alternative are given in the table. Alternative 1 Alternative 2 Variable costs $2.20 $2.70 Fixed costs $80,000 $30,000 Total assets $350,000 $350,000 Tasks: Jorge has asked you to provide detailed responses to the following questions: Analyze how the CVP analysis helps management in the planning stage of a new business. What is the break-even quantity for each of the investment alternatives? Analyze the breakeven differences between the two alternatives. What does the breakeven quantity tell you? Which alternative would you recommend to the company? Explain the pros and cons of each alternative and the reasons for your selection. Submission Details: Submit a 3-4 page Microsoft Word document, using APA style. Name your file: SU_MBA5004_W3_CP_LastName_FirstInitial.doc Submit your assignment to the Submisssions Area by the due date assigned.
Explanation / Answer
Answer : In this problem there are two alternatives given such as :
Selling price per unit =$3.45
Calculation of CVP analysis :
CVP analysis = Sales- Variable cost /Sales*100
(Alternative 1 ) =1.25/3.45*100 = 36.23%
(Alternative 2 ) = 0.75/3.45*100 = 21.73%
As we know CVP analysis helps the management in taking wise decision where there is planning of a new business and how it is run in the organisation as follows . Higher the CVP the better is alternative for the business suchas :
----------------------------------------------------------------------------------------------------------------------------------------------------
ALTERNATIVE 1 :
B.E.P ( in units) = FC/P-VC = 80,000/1.25 = 64000 units
ALTERNATIVE 2 :
B.E.P ( in units) = FC/P-VC = 30,000/0.75 = 40000 units
--------------------------------------------------------------------------------------------------------------------------------------------------------
Break even quantity of alternative 1 = 64000 units
Break even quantity of alternative 2 = 40,000 units
Difference in quantity are 24000 units
The difference is 24000 units because the fixed cost in alternative 1 is higher as compare to alternative 2 which shows that to cover all the cost alternative 1 required higher number of unit sold in the market as compare to alternative 2 . The shows that to cover all the cost in an economic alternative 1 covered all the cost as compare to alternative 2.
-------------------------------------------------------------------------------------------------------------------------------------------------------
Break even quantity tell us about that :
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALTERNATIVE 1 :
Here the minimum number of quantity sold is 6400 units . In this alternative fixed cost is 80,000 which required huge investmentbut once the fixed cost is covered profit per unit is $1.25.
Pros :
Cons :
ALTERNATIVE 2 :
Here the minimum number of quantity sold is 40,000 units . In this alternative fixed cost is lower which required less number of units sold but after that profit per unit is $0.75.
Pros :
Cons :
CRUX : From my point of view, Alternative 1 is selected because as contribution per unit is higher as well as CVP analysis is much higher than expected in this scanerio. Only break even quantity is higher but if once the goods has been sold than alternative 1 is more profitable than alternative 2.
Particulars Alternative 1 Alternative 2 Variable cost 2.20 2.70 Fixed cost 80,000 30,000 Total Assets 3,50,000 3,50,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.