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Boeing and Airbus Potential Joint Venture: Variable Cost Analysis Part 1 In order to use the provided information in determining optimum output and price levels as well as to determine whether or not Boeing and Airbus should engage In a joint venture on the VLCT project or would be better served by each pursuing their own individual venture, the simplest approach would simply be to graph the given equations (with the relevant additional information incorporated as necessary) an analyzing variances in slope and points of intersection. This visual analysis can be used to develop direct quantitative assessments of pricing structures and costs at various levels of output, determining the most cost-effective plan of action for Boeing and Airbus both collectively and individually. Specific components of this method of analysis will include plotting both the demand curve estimated by Boeing along with the company's estimated total variable cost (TVC) curve on the same graph. The same will be done for the two estimated curves provided by Airbus. This will allow a direct comparison of demand to output potentials, allowing for an initial assessment of optimal output pints or ranges. Calculation of the price of the planes that the market will bear (from the provided probability equations) will allow for the quantitative analysis of profitability at the previously identified optimum output levels, determining more certain and specific output and price points for the project. Finally, combing the two companies' estimates and graphing the resulting demand and TVC curves and engaging in the same analysis will provide a comparison of the joint venture to the two individual ventures. Part 2 1. Given .25 probability of a price of $125 million, a .25 probability of a price of $175 million, and a .5 probability of $225 million, the estimated price of the plane would be (in millions): (.25)125 + (.25)175 + (.5)225 = 187.5 The estimated price of the plane is $187.5 million. 2. According to Airbus estimations, demand will remain relatively steady at approximately 180, and variable costs follow a relatively straight line, increasing by approximately $100,000 per unit (assuming the numbers given are off by an order of magnitude of 1000). Optimum production output if these estimation are correct would essentially be equal with demand regardless of the pricing outcome, as the planes would be highly profitable even at peak production. With fixed costs of $500 million, total costs for the production of 180 units would come to just under $3.9 billion; sales of the 180 units at $187.5 million per unit would bring in revenue of $33.75 billion, for profits (less development costs, which are substantial of just under $30 billion. For the Boeing estimates, demand remains fairly consistent just under 200 units, though variable costs follow more of a curve an increase more sharply around 180 units, with a per-unit change of approximately $400,000 and up (assuming figures are off by an order of magnitude of 10). Planes remain highly profitable up until the estimated demand limit, however production slightly under demand at cheaper prices might be more advantageous to the company. With fixed costs of $700 million, production of 190 units has a total cost of just under $6 billion and a total revenue of $35.625 billion, again coming to just under $30 billion in profits (after development costs). 3. Combining the project estimates creates a flatter curve than presented by Boeing's estimates, yet with more rapidly increasing variable costs than the Airbus curve. Assuming $600 million in fixed costs, total costs at 180 units would be approximately $4.4 billion, which with revenue of $33.75 billion would be slightly less profitable for Airbus than going forward with a solo venture. At 190 units, costs would be $5.1 billion and with revenues of $35.625 billion this would be the most profitable venture for both Boeing and Airbus. 4. With this quantitative data, it seems clear that a joint venture would be the most profitable for the two companies. This course of action also has the advantage of sharing risks between the companies, and so makes sense from a qualitative and strategic standpoint as well. This particular analysis does not explicitly or directly take development costs into account, and it is in the sharing of these costs and potential reduction in costs through the pooling of resources that a partnership would potentially stand to have the biggest advantages over solo projects operated by either Boeing or Airbus.

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