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1. Given : Data below from a VA study
Current Selling Price /Unit = $95
Cost / Unit = $58
Current annual demand = 30,000 units.
Material cost reduction through value analysis = $2.50 /unit.
Labor cost reduction through value analysis = $3/unit
Cost increase in sales promotion = $1.50 /unit
It is proposed to charge the following rates for the product after the value analysis study.
For the first 10,000 units at $110.
Next 5,000 units at $100
Any quantity sold after 15,000 units at $105.
The value analysis and the marketing teams spent 60 and 40 hours at a cost of $120 and $100 respectively.
Required
What is the profit after the value analysis study for the first 10,000 units with the new price?
What is the profit for the next 10,000 units with the new price?
What should be the sales volume to realize a profit of $0.75M in the first year after paying for the value analysis study?
2. Galaxy Systems has operations in two locations, one in Asia and another one in South America. The following data has been collected from both the locations.
Determine which location has better labor, material, capital and total productivity.
| Asia | South America | |
| Labor | 10,000 hrs @ 10/hr | 15,000 hrs @ 12/hr |
| Material | $1.5M | $4.5M |
| Capital | $1.0M | $1.5M |
| Output | 1,000,000 $ 5/ unit | 2,000,000 $ 4/unit |
Expert Answer
PLEASE FIND BELOW ANSWER TO FIRST QUESTION :
Scenario after value analysis study :
Revised direct cost
= Initial cost – material cost reduction – labor cost reduction + cost increase in sales promotion
= $ 58 – $2.5 – $3 + $1.5
= $54 / unit
Other fixed costs incurred
= Cost of value analysis team + Cost of marketing team
= $120 + $100
= $220
New price for first 10,000 units = $ 110 / unit
Hence, Profit for first 10,000 units
= Total revenue – Total Direct cost – Other fixed cost
= Price / unit x Number of units – Revised direct cost/unit x number of units – Other fixed cost
= 110 x 10000 – 54 x 10000 – 220
= $560,000 – $220
= $559780
Price for next 5000 units ( i.e. 10001 to 15000 th unit ) = $ 100 / unit
Price for subsequent 5000 units = $105/unit
Therefore , average price for next 10,000 units ( i.e. 10,001 th till 20,000th unit) = $102.5/ unit
Average direct cost per unit for next 10,000 units = $54 / unit
Therefore , Profit for next 10,000 units with new price = ( $102.5 – $54) x 10000 = $ 485,000
Let the sales volume to realize $0.75 million or $750,000 profit = V
It is established that profit from first 10,000 units = $559780
Therefore, balance profit to be earned = $750,000 – $559780 = $190220
Profit earned per unit ( for quantity between 10,001 – 15,000 units )
= Sales price / unit – Direct cost / unit
= $100/unit – $54/unit
= $46/unit
Hence balance quantity to be produced above 10,000 to earn balance profit of $190220
= 190220/46 = 4135.21 ( 4135 rounded to nearest whole number)
Thus total quantity to be produced to earn a total profit of $0.75 million
= 10,000 + 4135
= 14135
Therefore V = 14135
| PROFIT AFTER VALUE ANALYSIS STUDY FOR THE FIRST 10,000 UNITS WITH NEW PRICE= $559780 |
| PROFIT FOR NEXT 10,000 UNITS WITH THE NEW PRICE = $485,000 |
| SALES VOLUME TO REALIZE A PROFIT OF $0.75 MILLION = 14135 UNITS |
