Safety Analysis of Manufacturing Investment Alternatives under Uncertainty of Product Selling Price, Sales Volume and Market Life

Abstract

With the recent diversification of product preferences and increasing competition among companies, uncertainty of product demand is increasing. Product market life becomes shorter and precise prediction of selling price, sales volume and market life of products is becoming difficult. As an analysis on investment for product manufacturing, it is insufficient to only calculate the profit / loss under their expected values. There is a need for a method to quantitatively evaluate the risk of investment proposals.

Within such a social background, this paper considers a method for evaluating the profitability and safety of manufacturing investment alternatives under the assumption that product selling price, sales volume and market life are uncertain. In the research, the concept of safety is first defined as the change in the rate of uncertain factors until the profit becomes zero. Next, the paper proposes a method for visualizing the profitability and safety of investment alternatives. In the method proposed, manufacturing investment alternatives are represented as triangles in the X-Y plane indicating the initial investment amount, annual fixed cost and unit variable cost.

This method makes it possible to observe superiority or inferiority of the investment alternatives from the viewpoint of profitability and safety against uncertain change of product selling price, sales volume and market life. In addition, the proposed method by using the X-Y plane can help to examine new investment alternatives with improved profit and safety. For example, it can consider improved alternatives which raise safety against shortening market life while maintaining the target profit by reducing the initial investment amount and increasing the unit variable cost.