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You have just landed a job as a financial analyst at IPS, a company that manufactures drives, processors, and other vital components for computer systems. On your first day, the CFO greets you: “Welcome! We are so glad to have you on board. Management has been anxious to set some new strategic goals, but the board recognizes that, at the moment, we just don’t have the information to proceed.”
She continues: “As you know, IPS’ premiere product is the MiniZ and we would like to grow our share of the market. We think we can do that by diversifying our product line. The board is expecting recommendations at an early date.”
You know that the task before you requires an understanding of the industry, fixed and variable costs, optimal level of production, and profit. Timely and accurate financial statements will be essential.
You decide that your first step should be to schedule a meeting with the company controller and his staff. In the meantime, you spend a few hours online searching for information about your new employer. You come across a couple of items that spark your interest: one about a client that went bankrupt, and another about the sale of a factory and its equipment. You also learn that there are only a few major players in the digital components industry.
When you meet with the controller, you ask about the online news stories. The controller admits that they are understaffed and haven’t gotten around to updating the financial statements to show the impact of the client’s bankruptcy and the sale of the factory.
He says, “The CFO will provide the demand figures for the MiniZ, and also the production specs.” He gives you access to the firm’s technical database. You leave his office thinking that you finally have all the information you need to do your job, but the CFO has requested one last piece of the puzzle: insight into the financial viability of two other companies in your industry. You agree and get to work immediately!
This project will require you to determine the structure of the industry of your firm, and its impact on production quantities and prices. You will prepare and analyze the financial statements of your firm to evaluate its financial health and its future prospects.
Begin with “Step 1: Analyze Industry Structure, Costs, Prices, and Optimal Production Levels.”
Question 1: Your first task is to determine whether your firm is in a competitive industry.
Based on the following demand function for the firm’s product, what would you answer?
Q = 50,000 – 25*P
Q is the amount produced and P is the price.
Now that you have examined whether your firm is in a competitive industry, let’s take a look at some questions related to price, cost, and profit analysis.
Question 2: At the profit-maximizing level, what is the relationship between marginal cost, marginal revenue, price, and average cost for firms in competitive and oligopolistic industries?
The CFO has provided the following information to you:
- fixed costs for the MiniZ are $2.75 million
- variable cost per unit is $200
She wants you to analyze the fixed and variable costs, optimal level of production, and profit for the MiniZ component.
Question 3: Find Q, P, average cost, and profit for the MiniZ at the profit-maximizing level. (Again, the demand function for the MiniZ is: Q = 50,000 – 25*P.)
Be sure to show your calculations in Excel and provide a narrative with each calculation about how you arrived at this answer and how these calculations make the company competitive or not competitive.