The Fashion of Zara

Case Name: Bragan Manufacturing

Student Name: Phoebe Qi

Student Number: 301186866

Who: Jim Marshall

     CMA

When: 1987

Where: Canada

In terms of whether implement “Bobby Bully” project, Paul Profit holds his argument that “Bobby Bully” would be detrimental to BML and provides several analysis to prove this new project is not profitable. However, Bill Bragan, the president of BML suspect of the truthful of Paul’s argument. More exactly, he thinks this project would be succeed and supposes that Paul’s decision is hasty and biased.

To certify the authenticity of Paul’s argument, the profit analysis provided by Paul should be analyzed first. For each estimated selling price, the number of sale units is determined by the highest probability of occurrence for expected sales provided by Marketing. However, the highest probability is 50 percentages and 60 percentages, which is just above half probability of occurrence. Thus, the projected sales and estimated selling prices are questionable. In other words, the estimated selling price may be able to be changed to achieve higher probability of occurrence for number of unit sales.

Due to each assembly’s production capacity is up to 20,000 units. The option 1, 2, and 3 all use one assembly while the option 4 uses two assemblies. Thus, all variable unit costs except supervision cost are same for all option. For the option 1, 2, and 3, the supervision cost per unit decreases with increasing number of unit sales. And the supervision cost per unit for the option 3 and 4 are the same. The first three option’s depreciation costs are the same, which is half of the fourth option. The overhead for the first three options increases by $5,000 for each 5,000 units of volume increase on each line while the overhead for fourth option is doubled compared with the option 3. In addition, the equipment could service up to four assembly lines, so the leased equipment cost for all options are $10,000. Besides, head office cost for each assembly line is $10,000 and it is available to produce up to 60,000 units. Thus, the head office costs for first three options all are $10,000, which is half of option 4’s head office cost. In a word, the fixed cost and unit variable cost calculations are correct and unbiased.

However, there is a serious problem for calculating breakeven volumes. Paul used $14.5 as variable unit cost to calculate breakeven volumes for all options. The variable unit cost should be $13.67 for option 2, and $13.25 for option 3 and 4. Thus, the correct breakeven volume for option 2, 3 and 4 should be 15,012 units 25,455 units, and 74,286 units respectively. The variance between breakeven volume and expected volume for the option2, 3, and 4 should be12 units, 5,455 units, and 34,286 units respectively. Thus, option 2 is the best option BML should choose and implement continually. According to details of leased equipment prepared by Paul Profit, the present value of leased equipment should be $289,600 that is less than $300,000. Thus, leasing equipment is better decision than purchasing equipment.