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Group-Project-Bus-5110-For-Marketing-Activity Part 4

The document discusses using incremental analysis to determine if a washer-dryer combination product line should be dropped or maintained. It allocates fixed costs between the product lines and calculates the net contribution of each option to determine which provides more profitability.

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oukhirahamid
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62 views3 pages

Group-Project-Bus-5110-For-Marketing-Activity Part 4

The document discusses using incremental analysis to determine if a washer-dryer combination product line should be dropped or maintained. It allocates fixed costs between the product lines and calculates the net contribution of each option to determine which provides more profitability.

Uploaded by

oukhirahamid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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❑ Calculating Internal Rate of Return (IRR)

IRR is a metric used to estimate the profitability of potential investment. It is a discount rate that makes the
net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. (

0 = NPV = σ − 0

Where: Ct = Net cash inflow during the period t


C0 = Total initial investment costs
IRR = Internal rate of return
t = The number of time periods
This is easily calculated by using the formula in Excel fx = IRR(Values, (guess))

This calculation yields and IRR value of -12.27%

Conclusion:
Based on the calculations, with NPV being negative, investing in adding a combination washer-dryer line is not
supported. Also, since the IRR is much lower than cost of capital of 8%, this investment option must be rejected.
Management needs to investigate as to why the variable and fixed costs are so high.

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Performance evaluation of all 3 products

Analysis to determine whether to drop or keep Washer-Dryer


combination product

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We will use the Incremental Analysis to determine if the Washer Dryer Combo should
be dropped or not.

❑ Option 1: Maintain the Washer Dryer Combo


❑ Option 2: Drop the Washer Dryer Combo
❑ Cost allocation Analysis
• According to Weygandt, and Al (2018), the only factors to be considered are those costs and revenues that differ
across alternatives, and those factors are called relevant costs, costs and revenues that do not differ across
alternatives can be ignored when trying to choose between alternatives. In our case Allocated Fixed cost is not
relevant for the incremental analysis since at overall firm level it will remain same, Hence when Washer Dryer is
dropped common cost allocated to it will be equally split to the other 2 product lines.

• In option 1 the fixed cost of ($1,950,000) is split between the three product lines ($650,000) each.

• In option 2 where W/D Combo is dropped, the fixed cost of ($1,950,000) will be split between the two remaining
product lines with ($975,000) allocated to each.

• Now let us calculate the net contribution for each option

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