For teams participating in Global Management Challenge awareness of production and sales costs for each product in each market (Europe, Nafta, Internet) helps to find a solution to the following management tasks:
- Determining a minimum price allowing selling without losses. Even if a company prefers dumping as its marketing strategy, knowing exact numbers makes this choice deliberate, and the consequences are easier to assess.
- Feeling the impact of some management decision, e.g. decreasing assembly time or increasing advertising costs.
- Cost change dynamics over several quarters facilitates shows whether capital expenditures like building factory facilities, buying new machines or hiring more staff were effective.
The information about the way GMC simulator calculates product costs is not disclosed. Even worse, it is not known if the costs are calculated at all, or the simulator operates with only aggregated indicators like total costs and net profit. Therefore, the method used by the simulator may differ from the one used by GMCModel. Although authors of this project used all available information made theirs best to propose a relevant and accurate method which is described below.
The product cost includes:
- Direct costs associated with each product: raw materials and components, workers wages, machine running costs, hired transport for delivery. These costs are shown in Income Statement.
- Indirect costs which cannot be obviously associated with a product: image advertising, personnel or management department, Business intelligence.
The calculation process consists of two phases.
- On the first phase direct and indirect costs are allocated among first, second and third products. Direct cost are initially calculated per products. Whereas indirect costs are allocated according to the bases specified in the table below.
- On the second phase all costs attributed to products are allocated/split between markets (Europe, Nafta, Internet) on in proportion to revenues from one or more markets.
The scheme below represents how product costs are calculated by GMCModel:
The tables contains allocation bases used in the first (per products) and second (per markets) reallocation phases:
| Cost type | Allocation Base among products (1st phase) | Markets where costs are reallocated (2nd phase) |
|---|
| Direct costs | (allocated initially) | All |
| Advertising in Europe | (allocated initially) | Europe |
| Advertising in Nafta | (allocated initially) | Nafta |
| Advertising in Internet | (allocated initially) | Internet |
| Image advertising in Europe | equally | Europe |
| Image advertising in Nafta | equally | Nafta |
| Image advertising in Internet | equally | Internet |
| Internet distributor | Internet Revenue | Internet |
| Agents in Europe | Sales volumes in Europe | Europe |
| Distributors in Nafta | Revenue in Nafta | Nafta |
| Internet service provider | Revenue in Internet | Internet |
| Sales office | Largest from sales or orders | All |
| Guarantee servicing | (allocated initially) | All |
| RnD | (allocated initially) | All |
| Web-site development | Revenue in Internet | Internet |
| Personell department | Workers wages | All |
| Machine maintenance | Machining time to product components | All |
| Business intelligence | Total revenue | All |
| Insurance premiums | Direct costs | All |
| Management salaries | Total revenue | All |
| Other costs | Direct costs | All |
| Depreciation | Machining time to product components | All |
| Finance expense | Total revenue | All |
Notice that the cost is inversely proportional to the quantity of the product sold on the market.