THE ELECTRIC TOWN CAR COMPANY - Essay Example

The variable costs of the product amount to 2000 pounds. Based on these two figures the contribution margin of a sale of a car towards the fixed costs of the company is 3000 pounds. The total fixed costs of the company which includes overhead related to administration costs, marketing, research and development and other costs is 150 million pounds. The end result of the breakeven analysis illustrated in appendix A is the company must sell 50,000 car units per year for the revenues of the company to equal its expenses.

The pricing point chosen by the company of 5000 pounds is between 4% and 16% lower than the competition. The ETC project requires a capital investment of 500 million pounds to be invested in buildings, machinery, office equipment, information technology system and other fixed assets. The investors interested in the project stipulated a minimum 15% return of investment (ROI). Appendix B provides a price sensitivity analysis that shows the annual demand of the ETC product depending on the price point of the car.

The Electric Town Car Company had a requirement of a 15% return on investment. At the original price of 5000 pounds the company produces a profit of 54 million pounds, but the return on the original investment is 10.8%, which is below the 15% requirement. In order to achieve the desired ROI the company must lower its price from 5000 pounds to 4600 pounds. At the 4600 pound price with a unit output level of 85,000 units the company obtains a 16.92% return on investment. It is recommended that the company operate at the 90,000 units full capacity output selling its product at 4600 pounds.

At this price and output the return of investment increases to 19.68%. All the figures depicted in this paragraph are illustrated in Appendix B. An initial requirement for the potential investors in the ETC project is to obtain a return on investment of 15%. This ROI based on an initial investment of requires the company to