Sec-Tech Co. is a software corporation that is evaluating the production of a ne
ID: 395483 • Letter: S
Question
Sec-Tech Co. is a software corporation that is evaluating the production of a new hardware product for WID (wireless Intrusion Detection) and governmental agencies are their main customers. The capital cost of the new production plant is expected to be $7,500,000 with annual maintenance costs of 3% of capital. Other annual fixed costs include $185,000 for utilities, administrative salaries are $135,000 per year and insurance is expected to be $78,000. The plant will depreciate over 20 years with a salvage value of $950,000 (use straight line method). Other fixed costs are estimated to be $165,000 per year. Variable costs can be broken down into materials: SmartEdge sensor at $600 per device; a Power Injector at $270 per device and other materials at $978 per device; and direct labor at $23.5 per labor hour with fringe benefits estimated at 22% of the direct labor cost. Sec-Tech has run several forecast scenarios for different selling prices (based on the potential agencies that will become their customers) and the results are presented in the table below: Average Sales Price (S/device) S1,725.00 S1,900.00 S2,005.00 S2,105.00 S2,300.00 S2,700.00 S2,825.00 s (in units) 10,000 500 250 500 750 875 Develop a breakeven capacity analysis for Sec-Tech's new device and determine: a. Best price, production rate, and profit b. Breakeven production rate with the price determined in part a. c. Breakeven price with the production rate determine in part a. d. Sensitivity of profits to: i) a 25% increase (and decrease) in variable costs; ii) a 17% increase (and decrease) in the selling price; iii) an 8% increase (and decrease) in the production rate.Explanation / Answer
Fixed costs of production
Annual Maintenance = 3x7500000/100 =225000
Depreciation per annum = 7500000-950000/20 =327500
Utilities = 185000
Salaries = 135000
Insurance = 78000
Other fixed costs = 165000
Total fixed costs = sum of all fixed costs = 1115500
Variable cost = 600+270+978 + 1.22 x23.5 xn
= 1848+28.06n
where n is the number of hours taken for one unit to produce. For the sake of simplicity, we assume that n=1,
Now, Variable cost = 1876
Profit with combinations
(a) With price 2825 and units 3875
Profit =3875 ( 2825 -1876) -1115500
= 2561875
(b) Wth price 2700 and 4750 units
Profit = 4750 ( 2700-1876) -1115500
= 2798500
(c) With price 2300 and 5500 units
Profit = 5500 ( 2300-1876) -1115500
= 1216500
(d) With price 2105 an 6250 units
Profit = 6250 ( 2105-1876) -1115500
= 1431250-1115500
= 315750
There is no point in checking with other values as they will yield even less profits.
We can see that combination of $2700 and units 4750 gets the max. profit
(b) Breakeven production at $2700
Q ( 2700- 1876) = 1115500
Q = 1353.76 =1354
(c) 4750 ( P-1876) =1115500
P =234.84+1876 = 2111
(d) If variable costs increase by 25%, the cost per unit will be
1876x1.25 =2345
Profit = 4750 ( 2700-2345) -1115500
= 570750
Profit will come to almost 20% of initial level.
If VC decreases by 25%, then it will be 1876x0.75 = 1407
Profit = 4750 ( 2700-1407) -1115500
= 5026250
The profit will be higher than about 80%.
(ii) If SP increases by 17%
Profit = 4750 ( 3159-1876) -1115500 = 4978750 which is 78% more than previous profits.
If SP decreases by 17% then it becomes 2700x0.83 = 2241
Profit = 4750 ( 2241-1876) -1115500 = 618250
which is 78% less than the previous profit.
(iii) 8% increase int he production rate will see the units increase to 5130
Profit = 5130 ( 2700-1876) -1115500 =3111620
which is 11% more than the previous profit
8% decrease in the production rate will cause the untis to reduce to 4370
Profit = 4370 ( 2700-1876) -1115500
= 2485380 which will cause a decrease of 11% in profit.
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