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Beauregard Textile Company,[object Object], Case Study,[object Object]
Cost and Demand Analysis Summary- T30 line,[object Object],June 14,  2011,[object Object],Folie 2,[object Object],Demand Analysis,[object Object],[object Object]
1989- BTC-56% (503K) and C&P 44% (400 K)
1990 (est)-BTC-33% (302K) and C&P 67% (450 K)
If prices of T30 ↑ expected 20% ↓in market size (225K to 180 K yards/ Q), BTC 100 K and C&P 80 K (BTC logistics advantage)BTC should keep its volume between 75K & 100 K yards to ↑ it’s earnings before tax,[object Object],Cost Analysis,[object Object],[object Object]
1990 – ASP 4, CM = 84 cents (21%), FC 80 cents, EM  1%
Total fixed costs @ 60000 USD, FC / unit ↓with higher units sold
We have taken only indirect costs associated with production as fixed costs – depreciation, supervision
All other costs are variable as they are directly linked to the number of yards produced
Need to reduce fixed and variable costs,[object Object]
Recover the cost ↑ in raw material (nylon, polypropelene, and rayon) by passing it on to it’s customers

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Beauregard textile company case study

  • 1.
  • 2.
  • 3. 1989- BTC-56% (503K) and C&P 44% (400 K)
  • 4. 1990 (est)-BTC-33% (302K) and C&P 67% (450 K)
  • 5.
  • 6. 1990 – ASP 4, CM = 84 cents (21%), FC 80 cents, EM 1%
  • 7. Total fixed costs @ 60000 USD, FC / unit ↓with higher units sold
  • 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%
  • 17.
  • 18. Help C&P increases price to 4 USD – windfall gain additional 25 K yards
  • 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
  • 35.
  • 36. BTC has a higher contribution margin than C&P
  • 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

  1. 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