Class 18 - Financial Model
April 24, 2001
Quick Adjust SLS Team
Seth Berman, Henry Boyle, Blake Gleason, Tom Gray, Ralf Klamma, Retro Pablano, Erik Stewart, Elina Valchanova (facilitator)
Quick Adjust SLS Team Economic Model Assignment
Financial Model Assumptions The Quick Adjust SLS devise will be sold in sport stores to owners or first time buyers of inline skates at a suggested retail price of $19.99. The brake is an add-on and can be easily selfinstalled by any individual. For the purpose of this assignment, we assumed that our team will continue to work on developing a final SLS product and market it to sport goods distributors on a pro bona basis, i.e. we did not include in our cost estimate any compensation calculations. Type of expense Development costs (engineering time, market research and prototype materials) – Total of $500 per month. Assumptions and associated costs In estimating the development costs we assumed that our team will complete this phase for 2 months by dedicating on average 5 hours per person per week on concept generation, customer needs / market research, design and development of alpha prototype. Thus, the development process requires: 160 people hours per week. However, as we did not receive any compensation for our labor, total engineering and research time cost is $0. Cost of materials used is $1,000. The costs associated with testing include the time required to perform stress testing, collect and analyze customer feedback, cost of replacement materials, video equipment, needed accident insurance, etc. We assumed that we need: 80 men hours per week for a total of $0 per month for reengineering work performed by team members, material costs of $15,000 video equipment costs of $1,000 insurance expense of $300/month. During the tooling and ramp up our team will incur: additional engineering costs of 40 men hour per week for ongoing redesign work. We will machine three of the parts required (upper and lower brackets and lever). Total costs for buying tools capable of producing 10,000 parts each month is (see unit sales analysis) is $30,000 each (cost estimate obtained from a vendor). As the production Time 2 months
Testing – Total of $5,666 per month.
3 months, starting at the beginning of the second month
Tooling and rampup costs – Total of $90,000
1 month starting in month 4
Quick Adjust SLS Team Economic Model Assignment
numbers per month are low, to reduce up front costs, we will not have spare tooling in case of machine failure (we will contract a vendor in case of production stoppage). Patent Costs – Total of $15,000 The team will file patent application as soon as possible. Patent expenses using patent lawyer firm will be in the range of $15,000. We will have initial advertising campaign budget that will be spent on advertising through the local radio, local sports stores and outdoor advertising. We plan to spend additional $20,000 per month for additional advertising, tradeshow visits, sponsorship events. In addition, we will hire 1 sales people with an annual salary of $60,000 to establish sales channels with wholesalers of sports goods ($5,000/ month). Assumed by sports goods wholesalers Unit production costs consist of materials, labor and overheads. Materials – approximately $2.00 per device (vendor estimate) Labor – we will have three people assembling and manufacturing the device (60,000 units per person per year). Salaries for the assembly workforce are $40,000 per year per person. Overheads are estimated to be in the range of $120,000 per year and include leasing shop space, electricity, water, etc. Close to 6 million rollerblades are being sold each year and there are 30 million existing inline skaters in the US (International Inline Skates Association). Although the trend is for sales of skates to decrease, in the next 18 months we will target to achieve volume of sales of: 1% of the total new sales of skates (as an add-on to the most popular model) and, 0.2% sales to the existing market One time expense in the forth month
Market Introduction Costs – Total of $25,000 Ongoing Marketing Expenses – Total of $25,000 per month
1 month during month 5
12 months starting in month 6
Distribution costs Unit Production costs (120,000 units per year) – Total of $4 per unit
NA 19 months – production starts in the fifth month
Unit Sales – 120,000 per year
19 months – production starts in the fifth month
Quick Adjust SLS Team Economic Model Assignment
Unit Price - $11.99
We will sell the SLS device for $11.99 to sport goods wholesalers.
19 months – production starts in the fifth month
Sensitivity Analysis Finding Please see table below:
Change in NPV (%) when variable is increased with 25% Change in NPV (%) when variable is decreased with 50% 0.00% 1.00% 4.80% 2.10% 8.60% -66.40% -99.70% 33.30%
Development Cost Testing Tooling and Ramp-Up Costs Market Introduction (includes patent costs) Ongoing Marketing Costs Unit Sales Unit Price Unit Production Cost
0.00% -0.50% -2.40% -1.00% -4.30% 33.20% 49.80% -16.60%
From the sensitivity analysis shown above, it is clear that in this model the variables with highest impact on the economics of the project are unit sales, price and costs. Slight deviation from the projected numbers will result in high variance of the NPV of the whole project. Unit price and sales volume are external factors and depend on the market environment – we have very little control over these factors. The estimates that we have made regarding production units is very conservative (120,000 per year) and our estimate of the price of the SLS device is based on sales prices of other popular inline skates breaking products. Production cost is an internal factor that we can control. To decrease the production costs we may want to find cheaper materials from the estimated $1.50 per unit and also automate the assembly process. As we have minimum costs associated with development, testing and marketing, these variables do not have high impact on the NPV analysis. However, this observation can result in a trade off between the development cost and time assigned and the performance of the product. If necessary, we will need to increase the cost associated with development, which will result in a higher impact of this factor to the total economics of the project.
Quick Adjust SLS Team Economic Model Assignment
Team Process We followed the same work organization as previous weeks. One person was in charge of taking care of putting the assignment together and delivering it. Each member of the team was assigned a task to perform, which included research on: cost of materials cost of labor number and cost of tooling necessary potential market penetration similar brake devices retail market prices size of inline skates market cost of marketing
In terms of development and testing costs, we came to our estimates based on team discussion. The team worked very well during this assignment – delegated worked was finished on time. We held number of meetings during the week and emails were exchanged regularly.
Prototype and Testing Progress The team is on schedule with the proposed timetable. We are completing some detailed design changes. In addition, we have initiated number of testings. No detailed findings from the testing process are available yet. In summary, since our last deliverable, we: machined bottom link holder machined upper link holder machined functional lever machined skate bracket water jet cut various spring steel links tested assembly of skate bracket with real skate clarified and expanded drawings discussed financial model
We also put together and distributed a clarification note on the specifics of the product based on the feedback from our last assignment and meetings with faculty. Please refer to Appendix A.
Quick Adjust SLS Team Economic Model Assignment
Appendix A Concept Description For the Inline Skate Speed Limiter The In-Line Skate Speed Limiter functions as a speed limiting device as well as a standard brake. The position of the mode selection lever determines which function will be engaged. Standard Brake When the lever is in the up position the standard brake mode is selected. In this mode the brake is at a preset height, approximately 3/8”, above the ground. Braking is accomplished by rotating the ankle backward. The rotation forces the link to press down on the brake until it contacts the ground. Additional ankle rotation causes additional brake force. The braking force that is applied depends on the required deceleration. This operation is similar to standard brakes except that this mode of slowing was purposefully selected. In this mode the straight link acts as an axially rigid member that transfers braking force to the ground with the intention of stopping the skater. Speed Limiter In the speed-limiting mode, no ankle rotation is necessary to engage the brake pad with the ground. The speed limiter mode is selected by rotating the lever and locking it in the down position. The rotation of the lever forces the brake to contact the ground. In addition the rotation of the end of the link and the force induced by the brake contact to the ground causes the link to buckle. The eccentricity in the link when the lever is locked in the down position is approximately .5 inches. The calculated buckling load of the link is approximately 20 pounds. In its buckled state, .5-inch eccentricity, the link can carry only 2 to 4 pounds. This “post buckled” load is what keeps the brake in contact with the ground when the brake is being operated as a speed limiter. In this mode, where the link is curved and resists load primarily in bending, the link acts as a soft spring that keeps the brake in contact with the ground.
Quick Adjust SLS Team Economic Model Assignment