Case study for economic analysis engineering and Technology

  1. Hy: $15.55k, Ryan: $100k, and Ryan: $85k are sunk costs. Should not impact your present/future decision.

Since sunk costs are costs which have been incurred in the past or costs which cannot be recovered they do not affect future and present decision. According to the case study Hy, $15.55k, Ryan: $100k and Ryan: $85k is sunk costs and therefore they have no impact on future decision. They have no effect on future or present decision because they have been totally incurred meaning that they cannot be recovered back into the business. Because decision making only has an effect on future course of the business, these costs therefore should be considered irrelevant in decision making process as they cannot be recovered by the business. It is important to ignore these costs such as Hy: $15.55k, Ryan: $100k and Ryan: $85k because the purpose of decision making is to change the course of the future and since these costs cannot be altered they must be avoided when making a decision on how to proceed. It is vital therefore to treat all these costs as gone already and base the decision making process on future and present costs and opportunities. The inclusion of these costs in decision making and they have been considered sunk costs, it is likely to make a bad decision which may negatively affect the business.

  1. Find PW for factory for both low and high sale prices for 30k sales in 1st year and 100% sale growth each year. Then make decision.   

Variable cost

Labor cost 5% of 316.67 =15.833

Material cost 10% of 400= 4.00

Total variable cost =      19.833

Fixed cost

Production and packaging fixtures =75000

Test equipment and software =225000

Fee marketing research =100000

Pocket expenses total $15,550

First, they negotiated an annual license fee of $150,000

Promotional budget                 60,000

Total fixed cost                             615550

Total cost = Fixed cost + variable cost

615550 + (19.833 x30000) 594990 = 1210540

End user prices are expected in range of $83.55 to $106.55.

Average price = ($83.55+$106.55)/2 = $95.05

Year Units Price Variable cost per unit Contribution
1 30000 95 19.833 75.167
2 60000 95 19.833 75.167
3 120000 96.04 19.833 76.207
4 240000 71.29 19.833 51.457
5 360000 61.78 19.833 41.947

 

Breakeven point

Year Units Price Variable cost per unit Contribution Fixed costs B.E.P
1 30000 95 19.833 75.167 615550 8189.099
2 60000 95 19.833 75.167 615550 8189.099
3 120000 96.04 19.833 76.207 615550 8077.342
4 240000 71.29 19.833 51.457 615550 11962.42
5 360000 61.78 19.833 41.947 61550 1467.328

 

Annual Demand for this product

Year demand Selling Price Revenues Cost Profit
1 30000 95 2850000 1210540 1639460
2 60000 95 5700000 1210540 4489460
3 120000 95 11400000 1210540 10189460
4 240000 95 22800000 1210540 21589460
5 360000 95 34200000 1210540 32989460

 

The range depending on selling price for the project’s present value

Year demand Selling Price Revenues Cost Cash flow NPVIF PV
1 30000 95 2850000 1210540 1639460 0.893 1464038
2 60000 95 5700000 1210540 4489460 0.797 3578100
3 120000 95 11400000 1210540 10189460 0.712 7254896
4 240000 95 22800000 1210540 21589460 0.636 13730897
5 360000 95 34200000 1210540 32989460 0.567 18705024

 

It is important to go with this idea because it is likely to increase the sales volumes in units when there is a reduction in prices. This also ensures that the business generates high profit margin which maximizes shareholders wealth and profit.