The basic question in this case is whether Airbus and Boeing should work together to develop a new VLCT airframe or should each company seek to develop its own version of the equipment. For the purposes of this analysis, you are to assume the Demand and AVC equations provided below are correct and reflect the additional analysis that representatives of the two companies were able to estimate within the context of the size of the market opportunity outlined on page 3 of the case. Be advised that, after further review, the Airbus analysts concluded the number of new aircraft needed during the next twenty years would be within thirty percent of the upper level outlined by Boeing in that context
Part 1
Given the demand and cost data you will have available (see information below), briefly describe the process you would use to determine optimum output and price levels in the development and production of the new VLCT equipment. The purpose of this section is not to perform any analytical evaluation, but rather provide a verbal description of the process you believe to be appropriate.
Part 2
Given the following:
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Airbus
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Boeing
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Demand
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P = 182.868 - 0.0003Q
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P = 198.6592 - 0.00013Q
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AVC Curve
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TVC = 104.8822Q - 0.001Q2 + 0.09Q3
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TVC = 25.8678Q - 0.00023Q2 + 0.4Q3
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In addition, the joint group analysis determined the market would bear a price per plane
somewhere within the following parameters:
Table 1
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Price per plane
(million $)
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Probability
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125
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.25
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175
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.25
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225
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.5
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1. First estimate the price per plane using the estimated prices and probabilities given in Table 1.
2. Determine the optimum prices and outputs for both Airbus and Boeing if they decide to proceed individually without collaborating in the development of the VLCT. Use the Demand and AVC equations outlined above in this analysis. Determine the profitability of this approach for each of the companies if the Fixed Costs are $500 million and $700 million for Airbus and Boeing, respectively.
3. Now analyze the potential for a collaborative approach by Airbus and Boeing. Assume there is a 50% probability that each of the companies' estimates is accurate in the Demand and Cost equations provided above. (Multiply both the demand and cost curves for each of the entities by 0.5, add them together. Then use that result to determine optimum price/quantity levels if they collaborate.) Also determine profitability assuming that the joint Fixed Cost is $600 million.
4. Finally, summarize the results of your analysis and make a recommendation about what you consider the most appropriate process for Airbus and Boeing to use in the development of the VLCT equipment. It is recommended that you use an Excel® spreadsheet to summarize the results. It might also be useful to construct an Excel® section for the quadratic formula that will be required for the analysis.