Hewlett-Packard’s Cases

Suppose you have the following data for a Deskjet assembly line, which has a project life of 2 years:
• Max capacity per line is 150,000 printers per year
• Fixed costs per line are \$30M (after depreciation, taxes, etc.)
• Variable costs are \$200 per printer

1) Graph the total costs as a function of sales for 0-200K units per year.

Note that the costs on the y-axis are costs over the entire project life of two years.   They are not annual costs.

2) Suppose that HP wants to make a profit of \$100 per printer at a target volume of 200K printers/year.   Superimpose the total revenue curve on top of the total cost curve in (1).

Assume 2 lines for calculating price, then let TV = target unit volume = 200K units/yr * 2 years = 400K units.

TC/unit@TV = VC/unit +   FC / TV = \$200/unit + \$60M/400K units = \$350/unit

Price = TC/unit@TV + \$100/unit = \$450 per unit.

3) What is the resulting price at the target volume?   (Assume 2 lines for this and all remaining questions.)

See above.

4) What is the breakeven volume at this price?   What is the beakeven utilization?

Let BV = breakeven volume, BU = Breakeven Utilization

TR=TC implies BV*Price = BV*VC/unit + FC   or BV = FC/(Price-VC/unit)

BV = \$60M/(\$450/unit-\$200/unit) = 240,000 units or 120,000 units per year.

BU = BV/Capacity = (120K units/year)/(300,000 units/year) = 40%

5) What is the operating leverage and contribution margin at 200,000 units per year?
CMR= (Price – VC/unit)/Price = (\$450/unit - \$200/unit)/(\$450/unit) = 55.6%

OL = (Price – VC/unit)/Unit Profit = (\$450/unit - \$200/unit)/(\$100/unit) = 2.5

6) What is the ROI at the target volume, assuming 10% of the fixed costs will be recovered at the end of 2 years?

ROI =   OL * Price * Unit Sales – FC + SV = 55.6%*(\$450/unit)*(400K units) - \$60M + \$6M
FC * Project Years                             \$60M * 2 years... [continues]

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