- Your firm designs training materials for computer trainingclasses, and you have just received a request to bid on a contractto produce a complete set of training manuals for an 8-sessionclass. From previous experience, you know that your firm follows an85% learning rate. For this contract, it appears that the effortwill be substantial, running 50 hours for the first session. Yourfirm bills at the rate of $100/hour and the overhead is expected torun a fixed $600 per session. The customer will pay you a flatfixed rate per session (Per Session Price.) If your profit markupis 20%, what will be the Total Price, the Per Session Price, and atwhat session will you break even?
Answer the following threequestions:
- What is the Total Price? This is what you would charge thecustomer so that you can have your profit markup of 20% over all ofyour costs. To calculate this, first figure out your cost per eachsession, add them up, and then add your profit.
- What is the Per Session Price? This is the revenue that thecustomer pays you each time you complete a session. It iscalculated by dividing the Total Price by the number ofsessions.
- What is the Break Even Point? At the beginning, your cost persession is more than your revenue per session. Gradually, yourcumulative revenue matches the cumulative cost, and eventuallyexceeds it so that you can end up with the desired profit. Thebreak-even point is the session at which, for the first time, yourrevenue exceeds your cost.
- A manufacturing firm has set up a project for developing a newmachine for one of its production lines. The most likely estimatedcost of the project itself is $1 million, but the most optimisticestimate is $900,000 while the pessimists predict a project cost of$1,200,000. The real problem is that even if the project costs arewithin those limits, if the project itself plus its implementationcost exceed 1,425,000, the project will not meet the firm’s NPVhurdle. There are four cost categories involved in adding theprospective new machine to the production line: (1) engineeringlabor cost, (2) non-engineering labor cost, (3) assorted materialscost, and (4) production line down-time cost.
The engineering labor requirement hasbeen estimated to be 600 hours, plus or minus 15% at a cost of $80per hour. The non-engineering labor requirement is estimated to be1500 hrs., but could be as low as 1200 hrs. or as high as 2200 hrs.at a cost of $35 per hour. Assorted material may run as high as$155,000 or as low as $100,000 but is most likely to be about$135,000. The best guess of time lost on the production line is 110hours, possibly as low as 105 hours and as high as 120 hours. Theline contributes about $500 per hour to the firms profit andoverhead. What is the probability that the new machine project willmeet the firm’s NPV hurdle? Use Crystal Ball simulation to answerthe question.
