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Hilton Case1

1. Dropping product 103 would decrease Hilton Manufacturing's profit by $2,543,000 for the first six months if fixed costs cannot be reduced. 2. The minimum sales quantity needed to avoid losing money by lowering the price of product 101 from $9.41 to $8.64 is 854,842 units. 3. It is difficult to determine the most profitable product based on the information given, but total contribution would indicate product 101 is most profitable.

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Ken Kandell
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316 views2 pages

Hilton Case1

1. Dropping product 103 would decrease Hilton Manufacturing's profit by $2,543,000 for the first six months if fixed costs cannot be reduced. 2. The minimum sales quantity needed to avoid losing money by lowering the price of product 101 from $9.41 to $8.64 is 854,842 units. 3. It is difficult to determine the most profitable product based on the information given, but total contribution would indicate product 101 is most profitable.

Uploaded by

Ken Kandell
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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1.

Sales Revenue from 101 and 102 ONLY Less Variable Costs (101 and 102 ONLY) Contribution to Fixed Costs Less Fixed Costs Add Back other income Profit (loss)

16,179,000 7,158,000 9,021,000 11,606,000 42,000 (2,543,000)

If product sales are independent and fixed costs are not able to be reduced or eliminated in the short term, the effect of dropping 103 would be a decrease in profit of $2,543,000 for the first 6 months. 2. Check Change in Price NA Expected Revenue Contribution Per Unit 5.25 NA 750,000 5.25 1,000,000 4.49 0.76 854,842 Do Nothing Drop Price Robustness

Total Contribution from 101 3,935,468

4,485,607

4,485,607

The minimum quantity that would have to be sold at the $8.64 price point not to be worse off than keeping the price at $9.41 is 877,355 units, and the minimum quantity to sell at $9.41 to avoid being worse off than decreasing the price would be 854,842 units. If Hilton Manufacturing can keep their volume higher than 854,842 units at the current price, keeping the price unchanged would be the best course of action for the company. 3. Contribution Per unit 101 4.49 102 5.12 103

5.29
Total Contribution 5,301,709 Contribution Margin (%)

8,970,582
48%

7,295,890

53%

51%

It is not exactly clear what Hiltons most profitable product is based on the provided information, because it is all dependent on what level and in which way profit is being measured. It is hard to tell what the relevant profit and cost figures are, because that can only be determined by what the analyst wants to gain from the data. With that said, most often profit is dependent on total contribution. Any product with a high contribution margin but low sales will not generate profits for the company. As a result, total contribution would determine the most profitable product, which in this case would be product 101. 4. The return to profitable operations in the first 6 months of 2004 appears to be due to increased sales volume, which has allowed the company to pass its breakeven point. The companys fixed costs (rent, property taxes, insurance, labor costs, selling expenses, general admin. Expenses, depreciation, and interest expense) were assessed to all 3 of the products being produced based on the production, which leaves us with the standard costs. The actual fixed costs were the same regardless of the production, resulting in a difference in expected costs. The total cost was lower than the standard cost, resulting in profitable operations.

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