Question: I need answers for highlighted parts. Thanks.
Manufacturing: Sales 5,000 units Price $10.00 Variable $2.50 Fixed Cost $35,000/month Full Cost $9.50 Current Profit $2,500/month
Steady Manufacturing: 5,000 units $10.00 VC$5.50 FC $20,000/month Full Cost $9.50 Current Profit $2,500/month
Swing took the opportunity to enter the new market segment, cutting its prices 15% to do so. Consequently, Swing's unit sales are now 7,000 monthly at a price of $8.50. Steady, however, was belatedly forced to match Swing's price in order to retain its customers in this market. Steady's management believes that it would have lost at least 60% of its business had it failed to reduce its price. Unfortunately, Steady is now operating at a loss.
Assume that if Steady were to withdraw from this market, it could reduce its fixed costs by half (by giving up its lease on the rental property and eliminating other sundry costs). The other half of its fixed cost is debt service on assets with no resale value.
Given the financial information that you have at this point, would Steady be better off to withdraw from this market altogether?
Fortunately, crisis has a way of focusing the mind. After reading Michael Porter's Competitive Advantage, Steady's management decided to analyze the entire value chain of which widgets are a part. Steady learned that at least 3500 units of current market demand comes from companies that must modify the commodity widget they buy to meet their specific needs. This creates an opportunity for Steady to integrate forward, casting specialized widgets to meet the needs of each user. While Steady's costs of manufacturing will rise substantially, the increase will be less than what buyers currently spend to modify the generic widgets.
To make specialized widgets, Steady would need to invest in additional fixed capital generating a fixed charge of $3,000 monthly and refocus its entire operation to produce specialized widgets exclusively. Steady's management believes that it could charge prices at least $6.00 higher than the going commodity price, but would incur additional variable cost of $3.00 more per unit.
What is the minimum monthly unit sales that Steady would require to make it more profitable as a specialty widget manufacturer than it is currently as a commodity manufacturer?
How much additional profit would Steady earn as a specialty widget, given its minimum case scenario of 3500 specialty units at a $6.00 price premium?