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Assignment 2: Final Project: Part 2

Final Project Scenario

You are an economist for the
Vanda-Laye Corporation, which produces and distributes outdoor cooking
supplies. The company has come under new ownership and management and will be
undergoing changes in its product lines and operating structure. As an
economist, your responsibilities include examining the market factors that
affect success or failure of a product, including the supply and demand for the
product, market conditions, and the behavior of competitors with similar
products.

The new owners are evaluating the
operating structure, and you have two possible alternatives. One alternative
requires a high level of investment in fixed costs compared to the other
alternative. Jorge, your supervisor, has assigned you the task of evaluating
the two alternatives.

Assume that the company has no debt.
Regardless of the alternative selected, market conditions will require the
selling price of the product to be $3.45 per unit. The details for each
alternative are given in the table.

Alternative
1

Alternative
2

Variable costs

$2.20

$2.70

Fixed costs

$80,000

$30,000

Total assets

$350,000

$350,000

Jorge has asked you to provide
detailed responses to the following questions:

  • How does CVP analysis help management in the planning
    stage of a new business? How does CVP analysis assist the decision makers of
    an existing business?
  • What is the break-even quantity for each of the
    investment alternatives, calculated using an algebraic approach? Complete
    the tables for each alternative using the Microsoft Excel Template given
    below and indicate the break-even points. Using Microsoft Excel, graph the
    relevant data, showing the break-even points and the profit levels for
    each alternative. Explain the differences between the two alternatives.
  • What is the degree of operating leverage (DOL) for each
    alternative at 90,000 units?
  • What is the significance of different DOLs using this
    example?
  • What does the return on equity (ROE) ratio tell
    management? How is it used in the decision-making process?
  • What is the ROE under each alternative at an output
    level of 124,000 for Alternative 1 and 60,000 for Alternative 2? (As the
    company has no debt, the formula for ROE becomes profit/assets. Use this
    formula.) Explain the reason for and significance of your answers.
  • Which alternative would you recommend to the company?
    Explain the pros and cons of each alternative and the reasons for your
    selection.

Click here to download the Microsoft Excel Template for this week.
This includes two Sheets, one for each alternative.

Submission Details:

  • Compile your calculations and graph in a Microsoft
    Excel spreadsheet named as SU_MBA5004_W3_A2_LastName_FirstInitial.xls and
    your analysis in a Microsoft Word document named as
    SU_MBA5004_W3_A2_LastName_FirstInitial.doc.
  • By Tuesday, April 19, 2016, submit these
    documents to the W3 Assignment 2 Dropbox.

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