Session 11 class.ppt

# The following data are available sales price 1750unit

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The following data are available: Sales price \$17.50/unit Equipment cost \$250,000 Incremental overhead cost \$50,000/year Sales and marketing cost \$150,000/year Operating and maintenance cost \$25/operating hour Production time/1000 units 100 hours Packaging and shipping cost \$0.50/unit Planning horizon 5 years Minimum attractive rate of return 15% To justify the product economically, what must the annual sales be, considering the TVOM?

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Principles of Engineering Economic Analysis , 5th edition Example 13.1 (Solution) Let X denote the annual sales for the new product. The AW of the investment alternative is AW (15%) = -\$250,000( A|P 15%,5) - \$50,000 - \$150,000 - 0.1(\$25) X - \$0.50 X + \$17.50 X = -\$274,578.89 + \$14.50 X Setting the AW equal to zero and solving for X gives X = 18,936.475 units of product
Principles of Engineering Economic Analysis , 5th edition Break-Even Chart for a New Product

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Principles of Engineering Economic Analysis , 5th edition Example 13.2 The Gizmo Mfg Co is also considering launching a more sophisticated product, which will compete with new product just considerd. The following data are available: Sales price \$42.00/unit Equipment cost \$525,000 Incremental overhead cost \$50,000/year Sales and marketing cost \$250,000/year Operating and maintenance cost \$45/operating hour Production time/1000 units 215 hours Packaging and shipping cost \$0.75/unit Planning horizon 5 years Minimum attractive rate of return 15% To justify the product economically, what must the annual sales for the sophisticated product be, considering the TVOM?
Principles of Engineering Economic Analysis , 5th edition Example 13.2 (Solution) Let Y denote the annual sales for the new product. The AW of the investment alternative is AW II (15%) = -\$525,000( A|P 15%,5) - \$50,000 - \$250,000 - 0.215(\$45) X - \$0.75 X + \$41.25 X = -\$456,615.67 + \$30.825 X Setting the AW equal to zero and solving for X gives X = 14,813.16 units of product Management must answer the question, which is more likely, selling 18,937 units of the basic product or selling 14.814 units of the sophisticated product? If a sales forecast indicates 25,000 units of product I or 18,000 units of product II will be sold, which should be launched?

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Principles of Engineering Economic Analysis , 5th edition Example 13.2 (Continued) If a sales forecast indicates either 25,000 units of product I or 18,000 units of product II will be sold, which should be launched?
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• Fall '17
• Mike Heny

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