TUTORIAL Problems
Session - Cost Analysis and Cost Volume Pricing
Problem definition and description:
Introduction
Many companies have critical changes in the dynamics of their markets, processes, capacities, and available labor to address different conditions on products and service offerings. Understanding what changes are needed to make the right decisions for the company addresses the subject of this model tutorial. The objective is to build a model and demonstrate different assumptions and describe various outputs to measure decisions. Each decision has unique results and must be quantified with tabulated results to visually present and justify the decision rationale selection.
Please download the Tutorial Model 1 Folder found in the course resources.
Create a unique revenue cost model (possibly from your company) for an eight volume/period scenario showing differing revenues using a price per unit variables as defined in the Tutorial Model 1. Your model should reflect total costs and have components of both fixed and variable costs in the model as shown in the example Tutorial Model 1. Unit and hourly costs per revenue unit sale should also be in your schedule model analysis.
Your model should also provide profitability for each of the eight volume/period scenarios and as a byproduct also create charts and graphs to show the results of the model output using different assumptions for volume, fixed and variable costs. Your final model should be able to capture a break even volume and price points to determine optimal pricing and volume effects for various simulations. Your challenge is to find the best cost and revenue mix that lowers break even based on product pricing justifying your decision. The model design must be hot linked for your charts and graphs in order to capture delta differences in your various simulations.
Application of problem solution:
Having defined the relationships of volume, price, fixed and variable costs in your simulation, create an output schedule with charts that demonstrates, using experimentation, where the optimal break even of your price volume assumptions are based on profit being equal to zero. Using that break even volume price combination to build a new series of assumptions using your price volume formula, demonstrate what happens from the break even point up the unit volume scale in your model for the 7 remaining periods. See example in the Tutorial Model 1 folder. Produce the second output schedule with charts to demonstrate the effect of costs, volumes, and prices.
Examples of problem application:
1. New product launch – your model should help determine best pricing through each stage of the product life cycle to determine opening price points to recoup various cost scenarios and what prices to gain more volume and what prices to set for incremental growth of the new product.
2. Your company is experiencing capacity problems that have different fixed investment requirements to stair step into different capacities and varying labor component costs for different volume assumptions. What pricing makes the most sense to achieve to maximize your return and offer best paybacks on your investment? Your model has the answer.
3. You have a new service marketing product that is purely based on providing more variable labor that needs training and has time schedule availability requirements. What price and volume points will provide more revenue and income based on adding more labor into each successive period – your model has the answer.
4. Your competition has lowered their price offering and your company must lower both variable process costs and install new capital equipment (fixed costs). What new prices to meet or be below you competitor will generate profits to remain competitive or to gain more market share? Your model can solve that problem.
5. You have a mature product in your company and are considering outsourcing to an overseas supplier. Before making the “make vs. buy” decision you want to test various costs and volume points to determine what would be the best combination of alternatives to keep vs. outsourcing alternative. Your model has the answer.
6. Other possible uses:
a. Your model can determine what additional fixed costs in invested capital can be justified for getting paybacks in designated time frames.
b. The calculations for both profitability and sales return in your model can be used to determine best product portfolio results for line extensions.
c. Multiple models can be used to compare one product line versus another product to select best profit contribution.
d. Investments in promotional advertising, modernization of processes lean manufacturing, business process re-engineering, and other marketing initiatives can be tested before implementation for best fit decisions.
e. Your model can also be used to build additional financial or accounting schedules that enable decisions on cash flow analysis or company profits.
Required results of problem solution
1.Produce model output showing where the break even price point is based on your model assumptions.
2. Create and output model from break even point to period 8 simulating added volumes and new price points based on growth.
3. Explain your assumptions and rationale in bullet format.
4. Provide schedules, charts, and graphs for each model simulation and a brief explanation of the economic changes and what decision is the best one based on your model outputs.
5. Develop new strategies for testing assumptions on both fixed and variable costs based on price changes and volume differences to seek best economic decisions.
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