Posted: December 3rd, 2014

CASE STUDY 1. The Hydrogen Car Project

CASE STUDY 1. The Hydrogen Car Project

A well-known multinational car manufacturing company has developed a prototype small town car fuelled solely by hydrogen. It intends to market this through a subsidiary company called the Hydrogen Car Project (HCP). This vehicle is code named H1. It will carry  a minimum of two passengers and have luggage space adequate for a family shopping trip.
The luggage space will be convertible into two child seats, greatly enhancing the ?exibility of this vehicle. Its maximum speed will be 60 mph (100 kph) and it will have a range of approximately 150 miles (240 km) from a full tank of hydrogen.
Harmful emissions from the H1 will be zero as the only waste product from running the engine will be water. Based on current energy prices, the H1’s fuel cost per mile is about half that of existing equivalent-sized cars. The number of hydrogen fuelling stations, although small at the moment, is gradually increasing and it is assumed that this will have reached a suf?cient level to support this type of car by the time the H1 is launched.
A comprehensive business plan has been produced to investigate the economic viability of this venture. During negotiations, the joint owners agreed that, due to the risks involved, it was essential that the return on capital employed (ROCE) should be a minimum of 15% a year. Having completed the business plan they also agreed that, due to the critical nature of the forecast sales volumes, independent market research should be commissioned to produce a demand forecast at selling prices within £1,000 of their initial estimate.

A) Extracts from business plan
The competition has been identi?ed as those electric/hybrid cars which have been recently introduced by most of the current global car manufacturers. Initially, the H1 will be built to a single basic speci?cation and the prices of the nearest competitors have been identi?ed as follows:
Car 1    £11,600
Car 2    £11,300
Car 3    £11,200
Car 4    £10,700
Car 5    £10,400

The business plan adopted a selling price of £10,000 for the H1 which gave a pro?t margin of 20%. It also assumed a level of activity which produced a ROCE of exactly 15%. To enable HCP to produce and market its electric car, capital of £1,000 million will be needed for buildings, machinery, of?ce equipment, IT systems and other ?xed assets.
The maximum production capacity is 90,000 cars a year. HCP’s best estimate for the production cost of one car is as follows:
£
Direct materials                2,266
Direct labour                400
Prime cost                2,666
Variable production overheads        334
Fixed production overheads        1,000
Manufacturing cost            4,000
Annual non-production ?xed overheads, including administration and marketing are expected to be £300 million.

B) Extract from market research report
Demand forecast:
Selling price            Annual demand
£                Units
11,000                44,880
10,800                53,720
10,600                59,160
10,400                62,560
10,200                64,600
10,000                68,000
9,800                71,400
9,600                74,120
9,400                78,200
9,200                85,000
9,000                94,520
Tasks:
1 Assuming the market research data to be more reliable than the assumptions made in the businessplan, calculate the total contribution and total net pro?t for each of the 11 demand levels shown in the marketing plan. (You are expected to use a computer based spreadsheet for this.)  (10 marks)
2 Advise HCP on its operating level and selling price. Include a discussion of the speci?c business risks involved. (Using succinct language, it should be possible to present your answer to this part on no more than two sides of A4 paper.)  (10 marks)
3 If HCP decided it needed to spend an extra £20 million on launching the H1, how might it achieve this without reducing its target pro?t? (Using succinct language, it should be possible to present your answer to this part on no more than two sides of A4 paper.)  (10 marks)

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