## Saturday, May 18, 2019

### Production Operation Assignment

Assignment 6 PRICING a) Computation of Economic Value of an offering Mercedes Benz is launching its high life SUV (called the CDL class) in a market dominated by Lexus GL. The CDL class uses diesel engine and obtains 25 miles per gallon. The Lexus model, setd at \$48000, uses bounteousness gasolene and obtains 20 miles per gallon. Both the models need to be serviced annually but the CDL being a diesel engine requires annual service that is costlier by \$100. The life of a diesel engine is typically yearlong hence the counterbalance rate of a 10 year old CDL is estimated to be \$1600 higher than the Lexus. sham (i) the average cost of premium gasolene to be \$3. 0 per gallon (ii) the average cost of diesel to be \$3. 25 per gallon (ii) the average customer drives 12000 miles per year and (iii) there is no time discount. What should be the impairment of the CDL such that the economic value of Benz CDL over Lexus GL (during a 10 year use view by a customer) is completely appropri ated by Mercedes Benz? The economic value of CDL Price of substitute=48000 Cost livery=(12000/20*3-12000/25*3. 25-100)=140 Revenue enhancing= sleep value=1600+residual value of GL Use persuasion=10 EV of CDL=48000+140*10+1600+residual value of GL=51000+residual value of GL The economic value of GL Price of substitute=XCost saving=(12000/25*3. 25-12000/20*3+100)=-140 Revenue enhancing=residual value=residual value of GL Use horizon=10 EV of GL=X+(-140)*10+ residual value of GL=X-1400+residual value of GL To make (51000+residual value) equal (X-1400+residual value of GL) X should be 52400 So the price of CDL should be lower than 52400 dollars such that the EV of CDL is higher than GL. b) Breakeven Analysis Nokia has decided to manufacture a redundant edition cellphone called HiRide for the teen market next year that will be sold with styles wireless service. For this phone, Nokias variable manufacturing cost is \$35 per phone.Fixed manufacturing costs amount to \$20 one million mil lion million and advertising costs are expected at \$6 million. Nokia will sell HiRide to retailers and pay its testify salesmen a commission of \$8 per phone sold to the retailers. The retail price (i. e. , price paid by the end customer) of the product is \$120 and retail margin typically average about 10%. (i) What is the price at which Nokia sells to retailers? Assume that the price is X, thus X*(1+10%)=120 X=\$109 (ii) What is Nokias portion per unit sales for HiRide? Contribution per unit= P-VC=109-(35+8)=\$66 (iii) What is Nokias breakeven volume?BE volume=FC/ share per unit=? (20000000+6000000)/66=393939. 4? 393940 (iv) Nokias actual sales in division 1 cancelled out to be 375000 units. Since the product did not break even, Nokias product manager decided to shrivel the commission offered to its salesmen in Year 2. Provided the sales volume, price, and other fixed costs remain the same as in Year 1, how much should be the in the buff commission so that HiRide breaks even in Year 2? Assume that it is X, thus The new contribution per unit would be 109-(35+X), which equals 74-X BE volume =375000=FC/ new contribution per unit=26000000/(74-X) So X =4. 76\$