COMM 101: Section 103
October 13, 2011
Lieber Light needs to decide whether or not it should purchase a patent that will cost, with interest, $567 408. The patent issues the rights to an innovative technology that assists in the production of a light sensitive glass that will allow Lieber to produce a new ECO skylight (ECOS). The
ECOS is an exciting prospect that can bring in new customers and secure current customers.
In order to determine the potential value and risk associated with purchasing the patent - and thus determine whether or not Lieber Light should make the purchase - the point at which the sales of the ECOS breakeven must be considered. Projected sales of the ECOS range from 4000 to 8000 units.
The breakeven point, in terms of just the ECOS sales, is 6 032 units.
400 000 x 1.066
First two years before sales begin:
(2yr salary of campaign and production manager)
+ 160 000
(2yr lease on manufacturing machine)
+ 567 408
(Price of patent with interest)
(lease for manufacturing machine)
+ 84 000
(salary of manager)
+ 214 852
(895 408 divided over the four years of sales with patent)
+ 50 000
+ [(40 000 x 0.7)/21 000]
C = 6.33q + 182q + 428 852
C= 188.33q + 428 852
R = 260q
P = 188.33q + 428 852 – 260q
P = 71.67q – 428 852
P = 71.67q – 428 852
0 = 71.67q – 428 852 q = 6032
For every ECOS skylight Lieber sells, a profit of $5.87 is lost in the sales of its other skylights. This value means little when it is not compared to the profits gained from the ECOS skylight. In order to determine the true breakeven point of the ECOS for sales of the ECOS and sales lost for other skylights, the profit lost must be compared to profit gained.
(0.7 x 60 000) Office Rent
90 000 Office Administration
+ (0.7 x 200 000) Salaries
30 000 Customer Care Group
25 000 Insurance
20 000 Utilities
270 000 Factory rent
(40 000 x 0.7)/21 000
C = 120q + 1.33q + 617 000
C = 121.33q + 617 000
The division of sales is 50% key clients and 50% non-key clients. Therefore, the average unit selling price is $180.
R = 180q
P = 180q - 121.33q - 617 000
P = 58.67q – 167 000
PLOST = PBEFORE - PAFTER
PLOST = (58.67q – 167 000) – [(58.67)(q – 0.1qECOS ) – 167000]
PLOST = 5.87qECOS
ECO SKYLIGHT AND STANDARD SKYLIGHT:
The point at which Lieber Light breaks even is when 6 518 units are sold. This means that over the four years that Lieber will sell the ECOS whilst retaining the production power of the patent, a minimum of 6 518 units must be sold in each of the four years. Based on the projected sales of 4000 –
8000 units, this value is attainable, but not guaranteed.
ECO SKYLIGHT AND STANDARD SKYLIGHT
PLOST = PECOS
5.87qECOS = 71.67qECOS – 428 852 q = 6 518
Because the breakeven value for the ECOS lies directly in the middle of the projected sales, there is great risk to purchasing the patent that will allow Lieber Light to manufacture the ECOS.
Depending on the decision Lieber Light makes, the result can go one of four ways:
Lieber Light does not purchase the patent. The company continues to fight for customer loyalty and spends the majority of its resources on tactics to fulfill and secure customer service satisfaction. In the meantime, another skylight company purchases the patent and begins its path to innovation and eco-friendly products. Lieber finds itself struggling to keep up with other skylight companies and never truly succeeds.
Lieber Light purchases the patent. The sales of the ECOS are dismal and barely surpass the minimal projected sales in the first, second, third and fourth years. Lieber