Rapid Fire

Finance Case: Rapid Fire

1. How much has it cost Rapid Fire to produce each Advantage battery? Prepare a per-unit statement of revenue and expense for the firm covering 1991-93 period.

Per Unit Statement of revenue and expense

1991 1992 1993 Average

Units sold 20 000,00 50 000,00 100 000,00 56 666,67

Average selling price, $ 43,00 43,00 45,00 43,67

cost of good sold 13,50 13,50 14,00 13,67

Direct material 8,67 8,67 9,00 8,78

Direct labor 4,83 4,83 5,00 4,89

Manufacturing overhead 27,00 27,00 28,00 27,33

Profit per unit 16,00 16,00 17,00 16,33

2. How much will it cost Rapid Fire to produce each Advantage battery over the course over the next ten years?

Production cost per unit, over a ten year period

Inflation forecast

Producer price index Production cost

1991 27,00

1992 27,00

1993 28,00

1994 0,02 28,56

1995 0,04 29,70

1996 0,03 30,59

1997 0,03 31,51

1998 0,03 32,46

1999 0,03 33,43

2000 0,03 34,43

2001 0,03 35,47

3. In developing a forecast of the total cost to produce the new Supreme battery in 1994, does your forecast of unit cost for the Advantage battery offer any useful information? Why or Why not?

From TABLE 5, Inflation Forecast: 1994 through 2001, we can read that it will cost the company $28,56 to produce the product in 1994. The production price has gone up $0,56 because of inflation. We can also read that from 1994 to 1995 the producer price index increases from 2% to 4%, which tell us that we will spend 2% more on producing the supreme battery in 1995. While from 1994 to 1995 the Consumer price index decreases from 3% to 2%, which makes the finished product available to customers for a slightly lower price. Hence the Profit per unit will slightly decrease from 1994 to 1995 and causing a lower sales revenue that estimated.

4. Given the product performance data shown in Table 3 and the warranty retention forecast shown in Table 4, how many warranty claims can Rapid Fire expect to receive in 1999, 2000, and 2001 from its sales of the Supreme Battery?

Year Products sold Failuring products Warranty Claims Estimated Cost

1994 40000 $28,56

1995

1996

1997

1998

1999 12000 7200 $240 698

2000 16000 8000 $275 466

2001 12000 3600 $127 678

5. In developing the total cost of warranty claims for the Supreme battery, is it necessary to consider potential claims before 1999? Is it necessary to consider potential claims after 2001?

TABLE 3 and TABLE 4 delivers estimates of what might happen in the future, so consideration should be made to potential claims before 1999 and after 2001. But we believe that such claims will be so marginal low that they are not necessary to consider.

6. Given you answer to Question 4 and 5, what is the total cost of warranty claims that Rapid Fire will experience in 1999, 2000, 2001?

Year Products sold Failuring products Warranty Claims Estimated Cost

1994 40000 $28,56

1995

1996

1997

1998

1999 12000 7200 $240 698

2000 16000 8000 $275 466

2001 12000 3600 $127 678

Total 40 000 18 800 $643 842

7. How can Rapid Fire incorporate the projected cost of future warranty claims from 1994 sales of its Supreme battery within the pricing framework of this product?

Important information

Rapid Fire after cost of capital: 14%

Added promotional expenses from the Supreme battery; $150,000

If Rapid Fire only incorporate one decade of warranty claim, and that the battery is produced at the same time it is made, they do this by discounting future cash flows back to 1994.

Using calculator

1) 1999: $240, 698

N: 5, I/YR: 14, PMT: 0, FV: 240698 PV=125,011

2) 2000: $275,466

N: 5, I/YR: 14, PMT: 0, FV: 275466 PV=143,068

3) 2003: $127,678

N: 5, I/YR: 14, PMT: 0, FV: 127678 PV=66,312

Cost of Supreme Battery

Production cost 1994 $1 142 400

Production cost 1999 $125 011

Production cost 2000 $143 068

Production cost 2001 $66 312

Additinal promotional costs $150 000

Total $1 626 791

Per Product cost $41