QUICK FIRE BATTERIES,

INC.
FIN490

Members: Sean Coykendall

Mark Novak
Andrew Worden
Yi Chen
EXECUTIVE SUMMARY

 In 2013, there were 100,000 Advantage batteries sold by Quick

Fire Batteries, Inc. that came with a four-year warranty.

 The Supreme battery project has to take into account the

inflation factor when calculating future cost of replacing the
battery.

 Allison realized that auto parts retailers could purchase batteries

from her competitors that carried an unlimited warranty for $40
to $60.

 The price elasticity of demand for automobile batteries could be

a factor in the Supreme battery sales.

 The Supreme Battery project for Quick Fire Batteries, Inc. should
be implemented.
Introduction
What is this case goal?
 This case study will describe the costs of providing an
automobile battery with a life time warranty for Quick Fire
Batteries, Inc.

 This process has to take into affect the future cost of

batteries they will be replacing as well as the probability of
failure on those batteries.
 EXECUTIVE SUMMARY-Financial Background

TABLE 2
TABLE 1 Quick Fire Batteries, Inc.
Quick Fire Batteries, Inc. Statement of Revenue and Expense
December 31, 2013
Corporate Sales History 2011 2012 2013
Net sales revenue $860,000 $2,150,000 $4,500,000
2011 2012 2013 Cost of goods sold
Direct materials 270000 675000 1400000
Direct labor 173400 433500 900000
Units sold (Advantage battery) 20,000 50,000 100,000 Manufacturing overhead 96600 241500 500000
Cost of goods sold $540,000 $1,350,000 $2,800,000
Average net selling price (per
battery) $43 $43 $45 Gross profit $320,000 $800,000 $1,700,000

Selling expense 96000 160000 425000

Administrative expense 64000 80000 153000
General expense 16000 40000 68000
Depreciation 64000 240000 425000
Total operating costs $240,000 $520,000 $1,071,000

Net operating income $80,000 $280,000 $629,000

Interest expense 32000 98000 189000
Earnings before taxes $48,000 $182,000 $440,000
Income taxes (40%) $19,200 $72,800 $176,000
Earnings after tax $28,800 $109,200 $264,000
EXECUTIVE SUMMARY-Financial Background

TABLE 4
Quick Fire Batteries, Inc.
Warranty Retention Forecast for the Supreme Battery
Proportion of Supreme customer base retaining warranty coverage:
5 years after purchase 6 years after purchase 7 years after purchase
60% 50% 30%

TABLE 5
Quick Fire Batteries, Inc.
Inflation Forecast: 2014 through 2021
Year Producer Price Index Consumer Price Index
2014 2% 3%
2015 4% 2%
2016 3% 4%
2017 3% 3%
2018 3% 3%
2019 3% 3%
2020 3% 3%
2021 3% 3%
Average annual inflation rate 3% 3%
Historical Production Costs for Advantage
Battery
Quick Fire Batteries, Inc.
 What the Cost Per-Unit Statement of Revenue and Expense
December 31, 2013
Quick Fire to 2011 2012 2013
Net sales revenue $43.00 $43.00 $45.00
produce each Cost of goods sold
Advantage Direct materials 13.50 13.50 14.00
Direct labor 8.67 8.67 9.00
battery ? Manufacturing overhead 4.83 4.83 5.00
Cost of goods sold $27.00 $27.00 $28.00
Gross profit $16.00 $16.00 $17.00

 What the per- Selling expense 4.80 3.20 4.25

Administrative expense 3.20 1.60 1.53
unit statement General expense 0.80 0.80 0.68
of revenue and Depreciation
Total operating costs
3.20
$12.00
4.80
$10.40
4.25
$10.71
expense ?
Net operating income $4.00 $5.60 $6.29
Interest expense 1.60 1.96 1.89
Earnings before taxes $2.40 $3.64 $4.40
Income taxes (40%) $0.96 $1.46 $1.76
Earnings after tax $1.44 $2.18 $2.64
Future Production Costs for Advantage
Battery

 How much will Quick Fire Batteries, Inc.

Advantage
Cost Per Battery Producer Price Index
battery cost in
the next ten 2014 $28.56 2%

years? 2015 $29.70 4%

2016 $30.59 3%

Quick Fire Batteries, Inc. 2017 $31.51 3%

Production Costs for Advantage
Battery
2018 $32.46 3%
Cost Per 2019 $33.43 3%
Year Battery
2011 $27.00 2020 $34.43 3%
2012 $27.00
2013 $28.00 2021 $35.47 3%
Forecast to Produce new Supreme
Battery
 The forecast of unit cost for the Advantage battery does off
useful information when developing a forecast of the total cost
to produce the new Supreme battery in 2014.

 Reason:
 the Supreme battery is exactly identical to the Advantage
battery, the only difference is that the Supreme battery will be
offering a lifetime warranty to its original purchaser

 Both of the Quick Fire batteries will cost the same amount to
produce, but the Supreme battery will include a warranty
replacement premium.
Expected Warranty Claims from Supreme
Battery
 How many warranty Forecasted Warranty Claims for Supreme Battery
claims can Quick
Fire expect to Year
receive 2019 2020 2021
in 2019, 2020, and
Retained coverage 60% 50% 30%
2021 from its sales
of the Supreme Projected failure rate 30% 40% 30%
battery? Expected warranty claims 18% 20.0% 9.0%

Number of warranty claims 7,200 3,360 454

Number of sales in 2014 40,000

Consideration of Potential Claims before
2019 and after 2021

 When developing the total cost of warranty claims for the

Supreme battery it is not necessary to consider the
potential claims that could occur before 2019 because the
battery has a projected 0% failure rate for the first four
years of the products life span.

 In addition, it is not necessary to consider the potential

claims after 2021 due to the fact all batteries should fail
within the 7 year life span. According to the projected failure
rates, after 7 years the batteries failure rate was 100%.
Total Warranty Claims Quick Fire will
Experience
 What is the total cost
of warranty claims that
Quick Fire will
experience in 2019, Quick Fire Batteries, Inc.
2020, and 2021 ? Total Cost of Warranty Claims for Supreme Battery

Year

2019 2020 2021

Cost per battery $33.43 $34.43 $35.47

Number of warranty claims 7,200 3,360 454

Total cost of warranty

claims $240,698 $115,696 $16,087
Incorporating Warranty Costs into Pricing
Framework
 What the Quick Fire Batteries, Inc.
total cost Total cost of warranty claims for Surpeme Battery in 2014
of warranty Year

claims for 2019 2020 2021

Total cost of warranty claims $240,698 $115,696 $16,087
Surpeme
Years until claim 5 6 7
Battery in
PV of total cost $125,011 $52,709 $6,429
2014? Total warranty expense in 2014 $184,150

Cost of capital 14%

Whole Sale Price of Supreme Battery
Quick Fire Batteries, Inc.
Whole Sale Price of Supreme Battery
Year
2013 2014
Net sales revenue $4,500,000 $2,373,200
Cost of goods sold
 What is the wholesale Direct materials
Direct labor
1400000
900000
price of Supreme Manufacturing overhead 500000
Cost of goods sold $2,800,000 $1,142,400
Battery?
Gross profit $1,700,000 $1,230,800

Warranty expense 0 184150

Promotion expense 0 150000
Selling expense 425000 224136
Net profit margin 5.87% Administrative expense 153000 80689
General expense 68000 35862
Depreciation 425000 224136
Price of Supreme Battery $59.33 Total operating costs $1,071,000 $898,971

Net operating income $629,000 $331,829

Interest expense 189000 99674.4
Earnings before taxes $440,000 $232,154
Income taxes (40%) $176,000 $92,862
Earnings after tax $264,000 $139,293
Should Quick Fire Proceed with the Supreme
Battery?

 Yes! Allison and Quick Fire Batteries, Inc.

should proceed with the Supreme battery in
2014.

 Overall, Quick Fire Batteries, Inc. should enter

the market with the Supreme battery.
Thanks