Imagine that you are the lead project manager for ThermoFisher’s new HPLC produc
ID: 2400927 • Letter: I
Question
Imagine that you are the lead project manager for ThermoFisher’s new HPLC product launch. This product is your baby. You have spent the last year redesigning this device and you have significantly improved its quality and performance. Based on the cost structure and the proposed price of $36,000 (from slide 10 of the “Break Even” Powerpoint lecture) you have calculated that the breakeven point for the number of HPLC instruments that will need to be sold over 5 years is 8,618. Marketing believes that at this price point they can pretty much guarantee a demand of anywhere from 1,500 to 2,080 units per year. However, you realize that at full capacity your manufacturing plant can produce 2,462 HPLC devices in any given year. You know that you have some operating leverage to boast profits if you can increase demand. You ask marketing for analysis on the impact to demand if they lower the price for this product to $33,000. They believe that at this price they can guarantee sales of anywhere from 2,080 to 2,640 units per year. However, In order to sell this many units, manufacturing capacity will need to be increased above its current maximum level of 2,462 units per year. You meet with the VP of Operations to discuss this opportunity. She proposes that for an additional $50 million dollars in equipment cost she can expand capacity by 25%. She believes that this investment will also increase worker productivity. She estimates that she will be able to reduce the time it takes to produce and test one HPLC device from 40 hours to 25 hours. With an increase in the number units produced she can now extract a larger discount from the vendors who sell the components that make up this product. She estimates that she can reduce the material cost from $19,000 per unit to $16,000 per unit. Because you feel that operating leverage is important in expanding profits you decide to take the initiative and discuss with the VP of Marketing additional pricing options. She tells you that she can significantly boast sales by setting the price at $31,000. At this price point she is confident that she can sell anywhere from 2,640 to 2,940 units per year. Unfortunately, marketing cannot provide a probability analysis, at any price point, showing the likelihood that demand will either be at the high end or the low end. As result, at any price point, you can only assume that there is an equal chance that demand will be either at the low end, the high end, or somewhere in between.Part 1: Budgeting the Income Statement and Balance Sheet Your first task is to understand the impact of either expanding production or not expanding production on the company’s balance sheet and income statement. You will need to project over the first two years of this product launch the key financial information on the company’s balance sheet and income statement. All key assumptions and inputs related to costs, demand, assets, liability, and equity that are necessary to project the balance sheet and income statement are included in the “Background Information” and in the attached excel file under the tab “Part 1 Assumptions and Template”. In this tab you will not only find the key financial data needed to project the balance sheet and income statement but you will also find a template of the balance sheet and income statement that you need to fill out. The specific Balance Sheet and Income accounts that you will need to project are highlighted in green. You will notice that the balance sheet and income statement have some accounts that are already pre-populated with numbers. Consider these pre-populated numbers essential assumptions in your projections that cannot be changed. Please note that the balance sheet and income statement that you are projecting is incremental to the company and only reflects the financial impact for this specific product launch.
For part 1, remember that the accounting equation is central in forecasting the balance sheet.
For Part 1, use the Balance Sheet and Income Statement template found in the excel file to complete your budget/forecast. In the tab “Part 1 Assumptions and Template” have highlighted in green the data points that you will need to fill in to complete the balance sheet and income statement.
Imagine that you are the lead project manager for ThermoFisher’s new HPLC product launch. This product is your baby. You have spent the last year redesigning this device and you have significantly improved its quality and performance. Based on the cost structure and the proposed price of $36,000 (from slide 10 of the “Break Even” Powerpoint lecture) you have calculated that the breakeven point for the number of HPLC instruments that will need to be sold over 5 years is 8,618. Marketing believes that at this price point they can pretty much guarantee a demand of anywhere from 1,500 to 2,080 units per year. However, you realize that at full capacity your manufacturing plant can produce 2,462 HPLC devices in any given year. You know that you have some operating leverage to boast profits if you can increase demand. You ask marketing for analysis on the impact to demand if they lower the price for this product to $33,000. They believe that at this price they can guarantee sales of anywhere from 2,080 to 2,640 units per year. However, In order to sell this many units, manufacturing capacity will need to be increased above its current maximum level of 2,462 units per year. You meet with the VP of Operations to discuss this opportunity. She proposes that for an additional $50 million dollars in equipment cost she can expand capacity by 25%. She believes that this investment will also increase worker productivity. She estimates that she will be able to reduce the time it takes to produce and test one HPLC device from 40 hours to 25 hours. With an increase in the number units produced she can now extract a larger discount from the vendors who sell the components that make up this product. She estimates that she can reduce the material cost from $19,000 per unit to $16,000 per unit. Because you feel that operating leverage is important in expanding profits you decide to take the initiative and discuss with the VP of Marketing additional pricing options. She tells you that she can significantly boast sales by setting the price at $31,000. At this price point she is confident that she can sell anywhere from 2,640 to 2,940 units per year. Unfortunately, marketing cannot provide a probability analysis, at any price point, showing the likelihood that demand will either be at the high end or the low end. As result, at any price point, you can only assume that there is an equal chance that demand will be either at the low end, the high end, or somewhere in between.
Part 1: Budgeting the Income Statement and Balance Sheet Your first task is to understand the impact of either expanding production or not expanding production on the company’s balance sheet and income statement. You will need to project over the first two years of this product launch the key financial information on the company’s balance sheet and income statement. All key assumptions and inputs related to costs, demand, assets, liability, and equity that are necessary to project the balance sheet and income statement are included in the “Background Information” and in the attached excel file under the tab “Part 1 Assumptions and Template”. In this tab you will not only find the key financial data needed to project the balance sheet and income statement but you will also find a template of the balance sheet and income statement that you need to fill out. The specific Balance Sheet and Income accounts that you will need to project are highlighted in green. You will notice that the balance sheet and income statement have some accounts that are already pre-populated with numbers. Consider these pre-populated numbers essential assumptions in your projections that cannot be changed. Please note that the balance sheet and income statement that you are projecting is incremental to the company and only reflects the financial impact for this specific product launch.
For part 1, remember that the accounting equation is central in forecasting the balance sheet.
For Part 1, use the Balance Sheet and Income Statement template found in the excel file to complete your budget/forecast. In the tab “Part 1 Assumptions and Template” have highlighted in green the data points that you will need to fill in to complete the balance sheet and income statement.
Key Assumptions No Expansion 33,000 Expansion 31,000 Sales Price Per Unit Forcasted Number of Units Sold - Year 1 Forecasted Number of Units Sold Year 2 Beginning Inventory at beginning of Year 1 Number of Units Produced in Year 1 Number of Units Produced in Year 2 Yearly Prouduction Capacity of Manufacturing Plant Marketing Expense for Year 1 & 2 Management Salary for Year 1 & 2 Supervisor Salary for Year 1 & 2 Number of Managers Number of Supeverisors Tax Rate on Income Sales Commission Average Collection Days for A/R Average Payment Days for AP 2,100 2,600 1,000 1,800 2,400 2,462.2 1,500,000 2,700 3,000 1,000 2,200 2,700 3,077.75 1,500,000 100,000 75,000 100,000 75,000 35% 5% 60 30 35% 5% 60 30 (1) Assume all account balances are zero at the Beginning Year 1 (2) Assume that fixed assets are drepeciated over 5 years using the straight line method
Explanation / Answer
Thermo fishers new product launch Proposed Price $36,000 Breakeven Point (No of Units over 5 years) 8618 Demand expected per year 1500 - 2080 If price reducted to $33000, Sales Expected 2080 - 2640 If price reducted to $31000, Sales Expected 2640 - 2940 Current Mfg Level (Units) 2462 Investment 50 Mn. $ Capacity Expansion by 25% (2462*1.25) 3,078 Reduction in Time from 40 Hours to 25 Hours Material Cost Reduced from $19000/Unit $16000 / unit Balance Sheet No Expansion Expansion End of Year 1 End of Year 2 End of Year 1 End of Year 2 Basis Assets Cash 50,02,973 2,79,03,188 1,63,18,219 4,31,93,955 Accounts Receivable 1,13,91,781 1,41,04,110 1,37,58,904 1,52,87,671 Sales / 365 * 60 days Inventory 1,33,00,000 95,00,000 80,00,000 32,00,000 (Opening + Produced - Sales Inventory)* Material Cost Total Current Assets 2,96,94,753 5,15,07,298 3,80,77,123 6,16,81,627 PPE 10,00,00,000 10,00,00,000 15,00,00,000 15,00,00,000 OnExpanding, PPE increase by 50 Mn $ Accumulated Depreciation -2,00,00,000 -4,00,00,000 -3,00,00,000 -6,00,00,000 Total Fixed Assets 8,00,00,000 6,00,00,000 12,00,00,000 9,00,00,000 Total Assets 10,96,94,753 11,15,07,298 15,80,77,123 15,16,81,627 Liabilities Accounts Payable Commision Payable 2,84,795 3,52,603 3,43,973 3,82,192 Commision / 365 * 30 days Material Vendor 28,10,959 37,47,945 28,93,151 35,50,685 Units Produced * Cost/ 365 * 30 days Long Term Debt 2,50,00,000 2,00,00,000 7,50,00,000 6,50,00,000 Total Liabilities 2,80,95,753 2,41,00,548 7,82,37,123 6,89,32,877 Equity Stock 8,00,00,000 8,00,00,000 8,00,00,000 8,00,00,000 Retained Earnings 15,99,000 74,06,750 -1,60,000 27,48,750 Total Equity 8,15,99,000 8,74,06,750 7,98,40,000 8,27,48,750 Total Equity and Liabilities 10,96,94,753 11,15,07,298 15,80,77,123 15,16,81,627 Incremental Income Statement No Expansion Expansion End of Year 1 End of Year 2 End of Year 1 End of Year 2 Formula Total Gross Revenue 6,93,00,000 8,58,00,000 8,37,00,000 9,30,00,000 No of Units Sold * Sales Price Less : Sales Commision * 34,65,000 42,90,000 41,85,000 46,50,000 5% on Sales Total Net Revenue 6,58,35,000 8,15,10,000 7,95,15,000 8,83,50,000 Expense Cost of Goods Sold Material Cost 3,99,00,000 4,94,00,000 4,32,00,000 4,80,00,000 Material Cost * No of Units Sold General Administrative Marketing Expense 15,00,000 15,00,000 15,00,000 15,00,000 As per Assumptions Management Salary 1,00,000 1,00,000 1,00,000 1,00,000 As per Assumptions Supervisor Salary 3,75,000 3,75,000 3,75,000 3,75,000 As per Assumptions Depreciation 2,00,00,000 2,00,00,000 3,00,00,000 3,00,00,000 5 Years Life for PPE Earnings Before Interest & Tax 39,60,000 1,01,35,000 43,40,000 83,75,000 Interest 15,00,000 12,00,000 45,00,000 39,00,000 Taxes 8,61,000 31,27,250 - 15,66,250 Net Income 15,99,000 58,07,750 -1,60,000 29,08,750 * Sales Commision can also ne shown as an expense. However above represents a better way to present * Labour cost has been ignored due to lack of information