**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 20,000^{th} 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 |