Part 1:
Cost analysis, litigation risk, ethnics. Sam Nash is the manager of a new product development of Forever Young (FY). Nash is currently considering Enhance, which would be FY’s next major product. All FY’s current products are cosmetics applied to the skin by the consumer. In contrast, Enhance is inserted via a needle into the skin by a doctor. Each treatment is planned to cost patients $300 and will last three months. Enhance fills out the skins that fewer wrinkles are observable.
FY plans t sell Enhance to doctors for $120 a treatment, providing the doctor with a large incentive to promote the product. Nash, however questions the economics of this product. At present, all the cost recognized, including manufacturing by a third party, are $100 per treatment. Nash’s main concern is the current costing proposal excludes potential litigation cost in defending lawsuits related to Enhance. Elisabeth Savage, the CEO of the company, totally disagrees with Nash. She maintains she has total confidence in her medical research team and directs Nash not to include any amount from his potential litigation cost of $110 per treatment in his upcoming presentation to the board of directors on the economics and pricing of the Enhance products. Nash was previously controller of FY.
Q1) What reason might Savage have for not wanting Nash to include potential litigation cost on the product in a presentation on Enhance’s economics and pricing?
Q2) FY sets prices by adding 20% to total costs. What would be the selling price per unit if Nash’s proposal includes potential litigation cost are also included? How might this price affect promotion of Enhance?
Q3) Savage directs Nash to drop any further discussion of the litigation issue. Nash is to focus on making Enhance the blockbuster product that field research has suggested it will be. Nash is uneasy with this directive. He tells Savage it is an ostrich approach” (head-in-thousand) to a real problem that could potentially bankrupt the company. Savage tells Nash to go and think about her directive. What should Nash do next?
Part 2:
CVP, target income, service firm. Teddy bear Daycare provides daycare for children Mondays through Friday’s. Its monthly variable costs per child are
Lunch and Snacks $100
Educational supplies $75
Other supplies (paper products, toiletries, etc.) $25
Total $200
Monthly fixed cost consist of
Rent $2,000
Utilities $300
Insurance $300
Salaries $2,500
Miscellaneous $500
Total $5,600
Teddy Bear charges each parent $600 per child
1) Calculate the break-even point.
2) Teddy Bear’s target operating income is $10,400 per month. Compute the number of children that must be enrolled to achieve the target operating income.
3) Teddy Bear lost its lease and had to move to another building. Monthly rent for the new building $3,000. At the suggestion of parents, Teddy Bear plans to take children on field trips. Monthly costs the field trips are $1,000. By how much should Teddy Bear increase fees per child to meet the target operating income of $10,400 per month, assuming the same number of children as is required in 2?