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Each quarter you must forecast sales and place an order with your production department for the number of units you want to be produced. If you add capacity, you may use it immediately.
A suggestion for your first order (Quarter 1) is 30,000 to 35,000 units. There is no guarantee this is the exact amount needed as it cannot be determined what the competition is going to do the first quarter. However, it is an approximation to get your thinking started. This is only a suggested order for Quarter 1; you may order any number you desire, depending on your pricing decision.

**Helpful Tips.**

>When you take over operation of the firm, it will have an inventory of 4,000 units.
> It is much better to have too much inventory than not enough. If you do not have enough inventory, your
orders cannot be filled and the customers will find another supplier.
> You may not produce any greater than your plant capacity.

You may expand the size of your plant to meet your sales demand. New capacity is available for production immediately when purchased. If you cannot produce the number of units you request on the decision form, the program will reduce the production to equal the size of the production facility. The addition to capacity is ordered in multiples of 1,000 units. The cost of adding each thousand units is $60,000 per thousand units. To expand capacity by 5,000 units would therefore cost $300,000. Capacity is reduced each quarter due to depreciation (wear and tear) at 3% of Available Capacity. Therefore, to keep the plant size the same, you must add 3% of the capacity in addition to size above.

**Helpful Tips.**

>When you take over operation of the firm, it will have an inventory of 4,000 units.
> Order additional capacity on the decision form in multiples of 1,000 units (e.g., 5 = 5,000). You may not add more than 10(000) units per quarter.
> New capacity that you order is available to use immediately.
> If all of this is confusing, we suggest adding 2,000 to 4,000 units in quarter 1 until you can understand this better.
>It is not good strategy to enter budgets that are lower than the beginning values. These are considered the “floor” for achieving sales.

This budget is to support the quality programs in your organization, to include purchasing, production, distribution, and marketing. In general, the higher the budget the more savings you will achieve in the per- unit cost of the delivered product. This is due to the lower number of reject products both in inventory and units already sold, but returned. The beginning budget is $10,000 and is considered by some in the organization as a bit small. Of course you can spend too much on this area and not achieve any further cost reductions. For this reason, continuously monitor your expenditures in this area and the per-unit cost of your product. The production cost at the beginning of the simulation is given in Table 2. If you notice that your cost was $17 and it goes down to $16.20, you may assume that the Quality Budget is working.

**Helpful Tips.**

> The per unit product cost may be decreased through the quality budget and by producing at the most efficient level of production in your plant which is 80 to 90% of capacity.

When you assume the management of the firm, it is charging $34 (wholesale) for the digital player. However, your firm may establish in one of three price ranges: $27-29, $33-35, and $39-41. If your firm wants to have a low price strategy then a price of $27 to $29 would be appropriate. If you want a mid-price policy then set the price between $33 and $35. If you want to have a high quality, higher price product then price between $39 and $41. Since you are selling at wholesale, the prices are in even dollars and not at the retail pricing scheme of odd pricing such as $26.95.The price levels and associated production costs of the product is shown in Table 2.

Table 2

**Helpful Tips.**

> You might understanding the pricing scheme better if you think of it as General Motors which has three different levels of products, Chevrolet-Buick-Cadillac.


While you may change prices each quarter, in general you should choose which category of pricing you want and stay within that range (low price, medium, higher price). However, if your inventory at the end of a quarter gets too large, you may want to reduce the price for one quarter in order to stimulate sales and sell the older inventory. You may not set a price of $30, 31, 32, 36, 37, or 38. Place the sales price on the decision form in even dollars within the range shown.

Advertising is a part of marketing that attracts prospective customers to purchase your product when they visit a retailer. In the simulation this might be advertisements in business, purchasing, and electronics products magazines. It may also take the form of advertisements to the final consumer that furnishes technical information about the product and why it is a “good value.” These are called "pull" marketing strategies. You are attempting to pull customers toward your product. Promotion expenditures are known as a "push" marketing strategy. Typical promotional activities include coupons and attractive point-of-sale displays that push merchandise into a customer's hands. You may also use rebate coupons and special cooperative advertising with the stores and distributors you do business with. For purposes of simplification in budgeting, the amount entered on the decision form is for both advertising and promotion activities. Last quarter the firm budgeted $50,000 for this area.

**Helpful Tips.**

> As with any expenditure, it is possible to budget too much for any item on the decision form and your decision value will hit the point of diminishing return. This means you are spending more than necessary. Only trial and error will indicate when you may have reached this point.

(Use negative value to lay off salespersons)
Even though you do not have a store in which to sell your product, you must reach the wholesale customers with the message about your product. While your advertising activities will accomplish some of this, a real person pushing your product is important also. When you assume management of the firm, it has two salespersons calling on current and prospective customers. You are charged $15,000 per quarter for each salesperson. This cost includes payroll taxes, insurance, and auto expenses. It requires about one quarter for a salesperson to learn the product, customers, and to become effective.

**Helpful Tips.**

> The same advice applies here in terms of the point of diminishing return. It is important to have enough sales people representing you but you can have too many also. You currently have 2.
> You may fire salespersons by placing a minus before the number to fire on the decision form. This is sometimes called “de-hiring.” It is the same thing but sounds less negative! The cost to fire a salesperson is $6,000 each in severance pay.
> The total cost of salespersons, severance pay, etc. will be shown on the expense report as “Salesperson cost.” Once you hire one or more salespersons, do not place them on the decision form again the next quarter as that many will be hired again.
> When you assume the management of the firm, there are 2 salespersons on the staff.

This budget is used for two purposes:
1. To improve and enhance the current product 2. To create a “break-though” product that has more appeal to certain consumers. If you create a “break-though” product you would be engaging in a “niche” strategy and your product would be designed, marketed, and sold to this special niche of consumers. You will be informed if your Product development department develops a break through product.

**Helpful Tips.**

> Last quarter the firm budgeted $50,000 for product development.

(Use a minus sign to make a loan payment)
If your firm needs more cash than it has available, it can borrow additional funds from its bank by placing the required funds on item 10 of the decision form. The current interest cost is 8% annually or 2% per quarter.

**Helpful Tips.**

> You may repay any part of your loan in any amount at any time. Place your loan payment on the decision form with a minus (-) sign. You may want to delay making any principal payments until you get a better feeling for your cash needs.
> If you do not borrow enough to meet cash needs, the bank will issue an overdraft loan and charge a higher rate of interest for one quarter on the additional loan amount (4% per quarter).

A market research firm conducts various studies in your industry and makes the information available for a fee. The following studies and costs are shown below.

> An estimate of total industry sales for the quarter, listed in units. Also, the Economic Index forecast for the next four quarters is given. Cost: $1,000. 

> Prices for the products of every company. Cost: $2,000

> An estimate of the average advertising/promotion budget, the average quality budget, the average product development budget, and the total number of salespersons in the industry. Cost $4,000.

> A focus group study of the Product Perception of all products in your industry. This report will be based on index numbers with 100 being the highest level of perception and moving down from there. It is possible to have a rating as low as 1. Cost $8,000

Add the total dollars you want to budget on market research and place it on line 8 of the Decision Form. For example, if you want only the first two studies, enter $3,000 ($1,000 + $2,000). If you only want the focus group study, enter $8,000. You may mix and match any combination of studies, and since these are unique values the program will issue the studies you desire. If you want all the research studies, enter $15,000 on line 8 of the Decision Form ($1,000 + $2,000 + $4,000 + $8,000). If you are not purchasing any studies enter a zero. Permissible entries include $0 to $15,000.

> An estimate of your market share will be furnished if your budget exceeds $3,000.

The firm paid $5,000 in dividends last quarter. (This is entered as 5). You may increase or decrease these dividends. The amount cannot exceed $10,000.00 per quarter! Also, a dividend may not by law be paid if there are negative retained earnings.