Ace Manufacturing Essay

Of all the topics in this course, many students find Lesson 4 to be the most frustrating. I think this may be due in part to an apparent contradiction on that point are lots of rime and equations to work with, but surprisingly little certainty in our conclusions. I assimilate do your frustrations at times. Fortunately, these parts are the only strictly financial case studies the only ones where number crunching is an end unto itself. However, basic financial analysis entrust always be an important part of our toolkit for making pricing conclusivenesss.The catalogue which follows contains the answers to these 2 case study assignments Ace Manufacturing and Healthy Spring Water. patronage the financial emphasis, they are similar to the previous cases insofar as theyre intentionally open-ended and somewhat vague to encourage you to draw egress all of the contingencies and factors that need to be considered. Theyre intended to stimulate thinking. If you chance a bit frustrate d by that, it probably destines theyre working. Only after youve identified the issues and concepts that are relevant to the questions can you uprise to focus your efforts on how to solve the problem.This is my answer key (of sorts) for the two appoint cases. I knowhow much many of you struggled with this case and your efforts were not in vain. Having had to slog through all of the confounding complexities of financial analysis is inevitable to fully prepared you for what may lie ahead in your victor endeavors.Ace Manufacturing1. What is the relevant unit cost for making this pricing decision? on that point are two primary substitutes that you might consider when approaching this question. Those of you who have this type of responsibility in a real human beings context are likely to suggest that fixed cost and G&A costs should be allocated equally/proportionately across the two products. At the opposite extreme, you might have chosen to argue that the extra 30,000 units sh ould only be required to cover the additive costs incurred implying a relevant unit cost of $7.50. Is one of these approaches better or more than correct than the other? Is one of them more realistic? More buttoned-up? Is one approach more conventional and does being conventional mean it is correct?Arguing persuasively for either position or a compromise view in between the two has some merit. And Ill certainly try to be fair in evaluating your work, but I have a bias toward being both conservative and coldly realistic. Heres my thinking building the units requires using designs that cost bills to build and tooling that the company borrowed money to purchase. These are direct fixed costs. They in addition require maintenance of the plant which is currently being covered by the first 150,000 units. Since incurring these costs is necessary to producing the additional 30,000 units, why shouldnt the additional 30,000 units be required to cover a fair share of the costs? That leaves the $60,000 increase in General and Administrative Costs associated with the advanced production which I would treat in the same way as the increases in direct fixed costs.Does all of this squabbling about how and where to allocate costs make a difference? It makes a big difference in evaluating the lucrativeness of pursuing this new account.2. Is this business sufficiently moneymaking to make bidding worthwhile? Although there can be a a couple of(prenominal) subtle variations on this analysis, heres the way that the two alternative approaches to allocating costs break downOne approach (Plan A) yields a profitable outcome $2.50 per incremental unit. The other, a dismissal of $1.25 per incremental unit. When you look at the total dollars columns, however either scheme generates the same level of profitability a net gain of $75,000.Confused? The notion of the incremental units diligence their fair share of fixed costs shows a net loss resulting from this additional business, but you cant argue with the total dollars outcome. dapple the additional units dont cover their fair share of costs, they add up $75,000 toward these costs costs that would not have been covered by the pilot film 150,000 units. In this situation, the concepts of fairness and conventional practice could obscure a profitable opportunity.Based on the financial analysis alone, the company should definitely civilise the new business. What other considerations are relevant? Well is there a potential downside in terms of indirect cannibalization and price erosion? Theres always the Walmart effect to worry about that if you sell an incremental volume of goods at a discount through an alternative channel, buyers may switch channels and 10,000 units sold at discount will take 10,000 units in sales at higher margins.Another concern is that prospective buyers will use the lower-priced inferior product as leverage in negotiating the price of the better product. Even slight pr ice reductions in the 150,000 of prescribed sales would wipe out any profitability gains from additional sales of the inferior product.A simple case study and two abruptly questions. But appearances can be deceiving.For grading purposes, Im flavor for a thoughtful analysis of the situation a recognition that theres more here than crunching a few numbers. A faulty answer would be one that rejects the possibility of pursuing this account without recognizing that it is a profitable venture from a strictly financial perspective.