Question

1. ‘We have to get this new product and fast’, said the Operations Director. ‘Our competitors are

close behind us and I believe their products will be almost as good as ours when they launch

them’. She was talking about a new product that the company hoped would establish them as

the leader in the market. The company had put together a special development team together

with their own development laboratory. They had spent £10,000 on equipping the laboratory

and the cost of the development engineers would be £20,000 per quarter. It was expected that

the new product would be fully developed and ready for launch within six quarters. It would be

so through a specialist agency that charged £10,000 per quarter and would need to be in place

two quarters prior to the launch. If the company met their launch date it was expected that they

could charge a premium price that would result in profits of approximately £50,000 per quarter.

Any delay in the launch would result in profits being reduced to £40,000 per quarter. If this

development project were delayed by two quarters how far would the break-even point for the

project be pushed back?

Answer 1

Total cost of the project

Equipping the laboratory 10,000

cost of develop engineers, 20,000 for 6 quarters= 20.000 * 6= 120,000

specialist agency cost is 10,000 for two Quarters= 10,000 * 2 = 20,000

total cost if project delayed= 10,000 + 120,000 + 20,000= 150,000

it would take 6 quarters to develop and ready for launch,and project delayed by 2 months (question)

total time taken to launch= 8 quarters

profit after launch is 40,000 per quarter

time required to recover the total cost after launch= total cost / periodical profit

150,000 / 40,000 = 3.75

break even point of project= total time taken to launch + time taken to recover total cost

= 8 quarters+ 3.75 quarters =11.75 quarters