TRIM TRENDS CASE - INTRODUCTION The fitness equipment...

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INTRODUCTION The fitness equipment market has increased drastically in the past few years, and the market is projected to at least sustain its size at the least, and possibly continue its growth. Sadly, TRIM has not mirrored the market’s growth. The public requires newer and more robust equipment than what TRIM currently offers, and TRIM is paying the price by losing market share to its competitors. Luckily, this reality is not set in stone for the future. TRIM has adapted to the issue by creating two brand new products, the Waste Line Reduction Machine and the Bicep Builder. The major problem with the introduction of these products is deciding whether they will be profitable and how to integrate the new products with both each other and existing offerings. These particular problems, as well as others, are brought forth and solved in this report.
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ANALYSIS The WLRM has a material cost of $60 and a target cost of $75 (75% of the $100 target price) meaning that only $15 of value can be added if target profits are to be met. The first analysis using ABC costing to integrate the resources required by the 7,500 units shows that over $44 of value is added, bringing the total cost of the WLRM to roughly $104. Additionally, using the same cost allocation process, 10,000 units of the WLRM requires over $41 of value added on top of the materials for a final cost of $101.63 per unit (see Appendix I, extrapolate that the 7,500 unit results are correct though there is no supporting appendix). The production of 20,000 units of the Bicep Builder can be seen to cost almost $15 in resources in addition to the $15 material cost, arriving at a $29.95 cost, fetching a 40% profit margin on target price of $50. Under this analysis, one would see that the choice is obvious: Build to meet maximum demand for the Bicep Builder and ignore the WLRM altogether. This decision is wrong, however, because the analysis is flawed. The ABC allocation ignores existing excess capacity within TRIM’s production line. This fatal error results in very inaccurate projections. Consider that the practical capacity of TRIM’s resources is the amount that is paid for in the given period. Whether or not the entire capacity is used, the same costs are incurred. Producing 7,500 units of the WLRM incurs no actual cost (other than the $60 for materials) that did not exist before. That is, the incremental cost of producing 7,500 WLRMs is the $450,000 material cost as shown in Appendix II. Examining the incremental costs only, we see that a profit of $300,000 is made on $750,000 of revenue – a %40 profit margin. The main point here being that if the WLRMs were not produced and sold, the excess capacity would be wasted and the resources would still be costed. Capacity utilization rises to 93.4% (Appendix II) meaning TRIM’s production line is essentially
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TRIM TRENDS CASE - INTRODUCTION The fitness equipment...

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