8. We have taken only indirect costs associated with production as fixed costs – depreciation, supervision
9. All other costs are variable as they are directly linked to the number of yards produced
10.
11. Recover the cost ↑ in raw material (nylon, polypropelene, and rayon) by passing it on to it’s customers
12.
13. C&P -Breakeven @ 3 USD occurs @ 300 K yards more than the market size -By selling more units of T30 C&P is a threat to BTC but loses money, can they reduce price to below 3, 2.85, VC= 2.80, 1.2 M yards
14. @ 4 USD & 74 K/ Q CM is 84 cents (21%) >fixed costs 80 cents (20%)- profit before tax 1%
15. Breakeven @ 4 USD occurs @ 72K yards (BTC profitable before taxes since Q1, 1990)
16. If C& P ↑ price BTC ↑its market share back to 56% of 180 K /Q or 100K ↑it’s profitability to 11%
19. Try to reduce fixed costs by looking at direct labour costs, space, lease contracts, supervisors
20. Try to reduce variable costs by working on raw material inventory & reducing the sales and administrative costs (line item review)
21.
22.
23.
24. In our analysis we find that the only fixed cost is the indirect costs related to the depreciation of the assets and the supervision of the personal on the shop floor
25.
26. BTC lost 22% of market share with a 33% price increase in Q1, 1990, C&P took its market share to 67%
27. Q4 pricing linked to volume, volume fixed @ 225k yards/Q, if both parties increase price to 4 then volume drops 20% to 180000 yards/ Q which we assume will be split 56% BTC & 44% C&P (100 K & 80 K)
28.
29. By ↑price -4 USD BTC ↑it’s contribution margin to 21% allowing cover of fixed cost & profit before taxes
30. By keeping price -3USD C&P ↑ it’s sales 66% (150k yards) & it’s contribution margin moved to 9%
31.
32. The only options are to either improve productivity and / or increase price as the total variable cost of production / yard is linked to the number of units produced (will increase in proportion) and by selling more @ 3USD price will not increase profitability
33.
34. BTC can cover it’s fixed costs and makes profit before tax by selling >72000 yard
37. Only by increasing price to 4 USD/ yard can BTC & C&P cover their fixed costs have positive earnings before taxes
Editor's Notes
Demand AnalysisT30 =225 K yards /Q (BTC-56%, C&P- 44%)1988- BTC-64% (575K) and C&P 36% (325 K)1989- BTC-56% (503K) and C&P 44% (400 K)1990 (est)-BTC-33% (302K) and C&P 67% (450 K) Market=price sensitive, low switching costs- when C&P ↑ USD 4 lost 33%, regained when ↓ USD 3, BTC lost 22% ↑ USD 4 (125 K -> 75k)If prices of T30 ↑ expected 40% ↓in market size (225K to 180 K yards/ Q), BTC 100 K and C&P 80 K (BTC logistics advantage)If prices of T30 stable @ 3USD demand stable @ 225 yards/ Q and market share balances (BTC-56% (125K) and C&P 44% (100 K)Cost Analysis1988 & 1989 T30 has been producing losses for BTC, in Q1 1990 BTC ↑ it’s price 33% to recover raw material costs, increase profitability & finance expansion and plant maintenanceSince 1988 fixed costs have been 60 K USD (41 cents/ yard) and variable costs have been stable @ 345 K USD (2.76 USD/ yard), contribution margin has been stable @ 32 K USD (24 cents / yard)Contribution does not cover fixed costs- need to increase pricePrice increase by 33% in 1990 from 3 USD/ yard to 4 USD, contribution margin increased to 84 cents making T30 sales profitable before taxes even if sales volume reduced by 20% to 75 K