BEA Project Analysis

A55 Project Analysis

Project analysis slide 2

Target price
360000

Costs for Submarine division

PROJECT: Electronic control – 3 different offers to

SUBMARI be assessed
NE A55
Other components
72000
Conversion costs
144000
 A55 Project Analysis

Project analysis
The offers for slide
the electronic systems are 3
the following...

ECONOMIC ECOLOGICAL
ANALYSIS ANALYSIS
FIRST OFFER: SECOND OFFER: THIRD OFFER:
SYSTEM DIVISION ELECTRONICS CO. CONTROL Lorem
Lorem ipsum dolor sit
TECHipsum
CO.dolor sit
amet, consectetur amet, consectetur
THE DIVISION OFFERS A PRICE OF THE COMPANY OFFERS A PRICE THE COMPANY OFFERS A PRICE
adipiscing elit, sed do adipiscing elit, sed do
140000 OF OF
eiusmod tempor eiusmod tempor
Of which 55000 are fixed 120500 100500
incididunt ut labore et incididunt ut labore et
costs.
dolore magna aliqua. dolore magna aliqua.
The company will in any case
face these costs.
 A55 Project Analysis

Project analysis
... but to take slide
the decision it’s fair to compare 4adding the fixed costs to the ones of the other
the offers
companies, considering that BEA will pay it even if Electronics co. or Control Tech co. will furnish the controls.
We assume, indeed, that is not possible to use the System division’s workforce – which constitute our fixed
costs - in other way if we choose to buy the electronic control from other companies.
SYSTEM DIVISION ELECTRONICS CO. CONTROL TECH CO.
Variable costs 50000* 120500 100500
Fixed costs 55000 55000 55000
Total costs 1050000 175500 155500
*(of which 21600 from cable division)

The numbers tell that the BEA company should choose to produce the system internally. The pure cost
structure will become the following: Cable
tot. costs 18000
System costs
tot. costs 101400
Sybmarine division
Tot. costs 317400
 A55 Project Analysis

Project analysis
We should then slide
divide the markup among 4divisions.
the different
This is the proposal for the markup in the value chain in order to reach a price of 360,000 €.

Prices and markup for the different divisions

Cable division System division Submarine division
tot. costs 18000 tot. costs 105000 tot. costs 321000
- of which variable 9000 - of which variable 28400 - of which variable 203300
-of which fixed 9000 - of which from Cable division 21600 - of which from System division 105000
% of fixed costs 50% - of which fixed 55000 - of which other components 72000
profit 3600 % of fixed costs 52% - of which for conversion 26300
mrk up % 20% profit 0 - of which fixed (conversion) 117700
revenues 21600 mrk up % 0% % of fixed costs 37%
revenues 105000 profit 39000
mrk up % 12%
revenues 360000
Final Price: 360.000
 A55 Project Analysis

Project
We consideranalysis slide
correct that the Cable division 4its margin because is operating almost at full
will maintain
capacity. Probably it has a price that is considered good by the market and a higher markup to "stimulate"
the internal transfer could be correct. However, we recommend to make an analysis of the competitors tin
order to understand if the fixed costs are appropriate, considering that the impact on the total costs is
relevant.

The System division instead should be forced to sell without markup. This reasoning is founded on two
reasons: the first is that the unit is not operating at full capacity, so that in this moment the fixed costs
probably have a greater impact on the total costs. Secondly, if we compare the pure price of the System
division to the one proposed by the competitors (thus, without taking into account our fixed costs) the latter
are able to sell the devices at a lower price (which probably includes also a markup). In conclusion, the
division should be incetivized to reduce the fixed costs in the long term in order to increase the markup.

We consider also correct that the Submarine division has a markup smaller than the Cable division because
the Submarine division used the System division’s engineers at cost, "transferring" part of result from the
System division to the Submarine one. In future, these transactions should be payed at the market price.
 A55 Project Recommendation
SHORT TERM
Systems Division
• Lowering the transfer price of Electronic Controls from €140k to €110k
• ROI for Systems division with this approach will still be 5%
• As long as the Submarine Division gets the supply internally from
Systems Division, BEA’s overall profit is maximized while keeping the
Systems division still interested in supplying to Submarine division
LONG TERM
Systems Division
• In the longer run, when the division runs at the good capacity, the
transfer price can be increased to €115k.
• Systems division can extract an additional markup compensation for its
R&D services
• Systems division will be incentivized to take measures to run at
increased capacity, which will decrease the average fixed cost making
the profit margin even bigger. ROI will be greater than 20%

Submarine Division Submarine Division

• Price €110k is still higher than than Control Tech Co’s but Submarine
division gets benefits such as better control at quality of the supply,
better lead time
• ROI for Submarine division with this approach will be 10%. With Control
Tech, Submarine division would have faced a price rise risk
• Price €115k is still lower than Electronics Co’s but Submarine division
gets benefit of better relations with System’s division, which then can be
leveraged to create new designs like A55 in future.
• ROI for Systems division with this approach will be 9%, which is
marginally different

Cables Division
• Currently working at its maximum capacity and with good return on sales, so they can continue with business as usual and maintain their profit margin.
• We recommend to make an analysis of the competitors tin order to understand if the fixed costs are appropriate, considering that the impact on the
total costs is relevant.
Thank You