Scenario analysis Road Equipment Company (REC) manufactures and distributes heavy construction equipment worldwide. REC's assistant controller, Alberta
Question:
Scenario analysis Road Equipment Company (REC) manufactures and distributes heavy construction equipment worldwide. REC's assistant controller, Alberta King, is aware that one of its primary competitors, Caterpillar, has implemented a re-manufacturing process, which refinishes recycled engine parts to new part specifications and performance. Caterpillar encourages its customers
(equipment repair companies) to recycle these parts by selling remanufactured parts with newpart warranties at a price much less than new parts, if the customer returns an old part prior to purchasing a replacement. King believes that REC must meet the competitive challenge posed by Caterpillar's new programme and also sees an opportunity to improve the company's financial and environmental performance.
King has asked you, as a new financial analyst at REC, to analyse alternative processes for new and remanufactured parts. You have gathered the following information related to the remanufacture of an engine's fuel injection case, a part commonly discarded and replaced during a major engine repair.
Required:
1. Prepare profit planning models for sales of new and remanufactured parts.
2. Use this model to analyse four alternative scenarios:
a. REC sells only new parts but loses 20% of its unit sales to Caterpillar, which expands its share of the market by selling increased quantities of remanufactured parts
b. REC sells 80% new and 20% remanufactured parts and maintains its level of unit sales.
c. REC sells only new parts, loses 20% of its unit sales (as in part
a) but an economic downturn reduces market demand for heavy construction equipment by 25%.
d. REC sells 80% new and 20% remanufactured parts and maintains its market share (as in part b), but an economic downturn reduces market demand for heavy construction equipment by 25%.
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