Cost Reduction Problem
Reducing production costs is an important part of improving your company’s profitability.
StratSim allows you to invest in cost reduction in two ways: technology improvements and cost reduction upgrades. Increasing technology capabilities can lower unit costs for all vehicles in the firm.
Upgrading a platform using the cost reduction option will lower unit costs for that vehicle only. In this assignment you will calculate the return on investment (ROI) for different cost–reduction options to help you in making your investment decisions.
1. Given the following project options, calculate the savings generated over five years. Assume next year’s savings hold constant for all five years. Then calculate the return on investment for each option.
Investment Option Estimated Cost
Projected
Savings
Next Year
Projected
5 Year
Savings
ROI
Increase Technology
Capabilities $220 mill. $34 mill.
Vehicle X
Cost reduction $180 mill.
$273/unit
on
300k units
Vehicle Y
Cost reduction $180 mill.
$218/unit
on
425k units
2. Given the returns you calculated, which option makes the most sense as a cost–reduction investment?
3. What other factors might you consider when evaluating the investment options?
