Assesment 2 - Step 3

Step 3

TriTornado Multi-Stage Hole Opener - Estimated Selling Price = $5000, Variable Cost =  $1666.66

Contribution Margin = Sales Revenue - Variable Cost

=$5000-$1666.66

=$3333.34

 

Dual-Pot Sand Filter Type A - Estimated Selling Price = $100,000, Variable Cost $60,000

Contribution Margin = Sales Revenue - Variable Cost

=$100,000 - $60,000

= $40,000

High-Voltage HVR/HVC Series - Estimated Selling Price = $350.00 -variable cost = $300.

Contribution Margin = Sales Revenue - Variable Cost

=$350.00 - $325.00

=$25.00

While my company has a comprehensive list of a large number of their products, they do not provide a price for these products. This is because they manufacture and provide equipment to a very specialised industry that requires a lot of customisation of their products. To estimate the price I research products that have a similar function and made a rough average of these products.

All three of these products have a positive contribution margin, meaning that the sales are higher than the variable costs. In other words the positive contribution margin is the figure left over that is not used up by the variable costs and contributes to covering the cost of the fixed cost and so improving profit.

The contribution margin for each of these three products differs largely. This is because they produce a wide variety of products within this field that hold different characteristics. Tritornado multi-stage hole opener is for drilling , the Dual-Pot Sand Filter Type A is for removal, and the High-Voltage HVR/HVC Series is a power supply. As they have differing characteristics they will each have differing selling price due to the different variable costs that are associated to the characteristics of that product. These variable costs are costs that change with the level of activity, these will include the materials and required manpower that are associated with a specific item. So because the Tritornado multi-stage hole opener will require less and different materials and manpower than the Dual-Pot Sand Filter Type A it will require different variable costs for the different products. As the variable costs are different between them they require higher of lower prices to meet those variable costs.

So if the Tritornado multi-stage hole opener has the highest contribution margin, why would Hunter PLC not only produce this product? This is because doing this would only benefit the equity investors in the firm, who are seeking to maximise profits. While the firm may only have a select few major client's, that require a large range of equipment in their field. If they only have one product in an industry where a wide range of products is required, their client base will go elsewhere.

Constraints

The market constrain that is dominant for my company is the oil demand. Typically when there is a high demand for oil there is a high demand for the equipment and services to retrieve the oil and when there is a low demand for oil, the demand for my company's services lower. 

The resource constraint that my company would have to deal with is the cost of materials required to produce their equipment. Some of their electrical equipment is very high tech and requires rare earth elements. As this is a Bristish based company it would need to import these elements from China, which is the majority supplier on the planet. In addition to the large expense of these elements, Hunter PLC will have to deal with the exchange rate.