Production Level
Cuddly cards have requested a brief report analyzing the different combinations of production concluding with the most profitable and least profitable methods. The data given were predictions summarised as a probability distribution of possible sales, fixed and variable costs and two possible retail prices. The difficulty with my predictions lay in the fact that there was a great deal of uncertainty.
The five different sales volumes were summed up as probabilities that lack 100 % accuracy. Fixed costs could alter between 25,000 depending on rates and rent. There was also a possibility that sales revenue per hundred cards could change from 40 due to the competitiveness of that market. With so many uncertainties, the only solution was to draw up three tables comprising of each individual possibility with all of the different variables.
Executive Summary
The main findings that have been gathered through the many calculations shown in the three tables will aid Cuddly Cards in making their decision about their production level. If Cuddly Cards take into consideration the most probable demand level (210,000 cards) and take an optimist’s view 39,891 profit could be made. However, if Cuddly Cards take a pessimist’s view, still considering the most probable demand level, the profit that would result would be 9,891.
If Cuddly Cards wanted estimations as to the most profit and least profit they could make without taking into consideration the probabilities, the Expected Values provides such information. The most profit Cuddly Cards could make is 40,304 producing 240,000 cards when fixed costs are20,000 and revenue is 50 and the least is 7,065 when revenue is 40 per 100 cards and fixed costs are 25,000.
The decision
Cuddly Cards should come to under the three decision criteria depend on whether they wish to be optimistic or pessimistic. As the Costs table shows, the least cost would be when producing 150,000 cards with fixed costs of 20,000. Total costs amounts to 47,935. The highest cost would be when producing 270,000 cards with fixed costs of 25,000. Total costs amounts to 75,283.
Under the Total Revenue table, it is clear to see the highest revenue achieved is when the quantity is 270,000 and the price is 50. Total revenue equals 135,000. The least revenue which could be achieved is when the quantity is 150,000 and the price is 40. Total revenue equals 60,000. The Profit table shows the minimum and maximum values. The highest profit would be at a fixed cost of 64,717. The lowest profit would be at a fixed cost of 15,283.
Cuddly Cards need to be aware of the competitive market and how it can force companies to change their prices. Through a competitive market, prices fall and demand increases. This results in a greater production level in which fixed costs can be spread over. The decisions made under each criterion are not sensitive to the possibility of the market increasing its competitiveness as they show the highest and lowest possible profit. However, should Cuddly Cards feel the need to decrease their prices from �50 to �40 due to the competitiveness of the market then each table shows the effect this will have.
Recommendations
I would recommend that Cuddly Cards take into consideration that the demand of 210,000 cards is most probable. It is possible to account for an optimistic and pessimistic approach by adding together the profit made in each case, i.e. 5,891 (optimist’s perspective) and 19,891 (pessimist’s perspective) and then averaging them. This, therefore, takes into consideration the different fixed costs and a possible drop in revenue price. Cuddly Cards should, therefore, at producing 210,000 cards, be aiming for a profit of 32,891.
