Problem:
Dan Miller is a dentist who has a successful practice in a medium-sized city. Recently business suffered as a result of patients not paying their dues on time. The problem intensified so much so that he decides to do something about it. A consultant suggests that he offer 5% discount for immediate payment, but Dan is not sure if that will solve the problem. He also wonders how much this move will cost him. One of his friends tells him that the discount offer would be a bad idea because he knows of a construction company that used the discount policy, which ended in disaster. The company lost 5% of its revenue on those who would have paid promptly anyway, and those who did not intend to pay on time simply did not pay.
Critically analyze Dan's friend's advice. Point out the relevant aspects as well as any judgments in the advice. Does Dan's friend make any questionable assumptions?
Mention other alternatives for Dan Miller and describe their relative advantages.
On January 1, 2009, ABC Company started the business with AED 1,000,000. The Company intends to produce and sell a single product called Alpha. The following projections are extracted from its business plan for the upcoming year. The normal production capacity is per year is 40,000. However, the projected sales is 32,000 units.
All amounts are in AED.
Selling price 160
Variable cost (VC):
Direct labor 54
Direct material 26
Variable overhead 10
Variable selling expense 20
Variable Admin. Expense 10
The production of Alpha requires a regular maintenance of the machinery. The maintenance is a mix (semi variable) cost with the following components:
Variable cost per hour 10 (production process requires 2 hours of maintenance)
Fixed cost 110,000
Additional fixed costs are:
Selling 100,000
Administrative 300,000
Manufacturing 200,000
Required: Based on the above facts, please answer the following questions. Show your supporting calculations.
Question 1. What is the break-even units in quantity?
Question 2. What is the cost formula for Alpha?
Question 3. What is the average cost of production per unit?
Question 4. Using the CRM approach, would you recommend spending 100,000 in advertising to increase sales by 10%.
Question 5. What is the projected level of income?
Question 6. What would be the required level of sales if the company had a fixed target loss of 200,000 plus a variable profit equal to 10% of sales?
Question 7. What would be the cost formula for the semi-variable cost?
Question 8. What would be the minimum selling price for a one time sale of 4,000 units to a foreign customer?
Question 9. What would be the anticipated profit of a single unit of Alpha.
Question 10. What should be the selling price of Alpha, if the Company desires a 10% rate of return on its initial investment.
Question 11. Write a brief introduction describing what is the objective of the assignment, introduce the subject of the discussion, and give a brief overview of what would be presented (discussed) in the report.
Question 12. Write a brief summary. The purpose of the summary section is to present the highlights of the topics discussed in the report.