Pacific Telemet Ltd. manufactures a high end smart phone with dual sim a card that is popular with business executives who travel overseas frequently. Related financial data for this product for the last year is as follows:
Sales 12,000 units
Selling price $460 per unit
Variable manufacturing cost $184 per unit
Fixed manufacturing costs $360,000
Variable selling and administrative costs $36 per unit
Fixed selling and administrative costs $600,000
The CEO is under pressure from the Board of Directors to increase the profitability of the phones and has asked executives from different departments for suggestions. Three managers have responded with the following ideas:
- The production manager, David Groate, suggests making improvements to the quality of the product. These quality improvements would increase the variable costs by $36 per unit. This would be accompanied by a $60,000 national advertising campaign which he expects would boost sales volume by 30%.
- The sales manager, Kirsten Arnold, believes that the product is unique, but not yet well known enough. Based on her market research, she feels that advertising should be increased by $120,000 and that the product would also be able to bear an increase in price of $60 with sales volume reduced by 12% from the current levels.
- The marketing director, Jess Sutherland, wants to undertake a promotion campaign where a $40 rebate is offered to the first 2,500 phones sold. She expects that the rebate program would boost sales by an additional 2,000 units if spending on advertising was increased by $50,000.
You have been asked by the CEO, Sherri Watkins, to comment on each of these three proposals before she presents them to the Board of Directors. Draft a report in response to this request. You are not asked to make one particular choice or recommendation, but rather to explore the potential strengths and weaknesses that include discussion on the breakeven, potential profits and, where possible, the margin of safety related to each proposal. Keep in mind that the sales volumes should be treated as estimates only and your report should consider potential variations in actual sales and their effects. Give both qualitative and quantitative support to your comments.
You are the accountant for Go-Go-Grow Ltd, a children’s electric toy car manufacturer that is located in Geelong and has customers in Australia and the USA. Their estimated current sales volume is 5,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit:
Manufacturing Costs per unit (Based on production of 5,000 units per month)
Direct Material Cost $150.00
Direct Labor Cost 75.00
Variable Factory Overhead 35.00
Fixed Factory Overhead 40.00
Total Manufacturing Cost 300.00
Selling & Administrative Costs
Variable Selling and Administrative Cost 35.00
Fixed Selling and Administrative Cost 25.00 60.00
Total Cost per Unit 360.00
Selling Price per Unit $720.00
Mantel Ltd is an overseas company that sells toy cars all over the world, with the majority of their market to wealthy new parents in China and India. They have approached Go-Go-Grow about obtaining a quote for a special one-off order as they would like to purchase 20,000 toy cars. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.
This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Mantel Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses.
- Given this knowledge, what amount should Go-Go-Grow Ltd. bid for this contract in each of the following circumstances:
- The Go-Go-Grow’s annual factory capacity is 90,000 units.
- The Go-Go-Grow’s annual factory capacity is 75,000 units. (To fulfil the order, you may have to pull the product from your regular production).
- Assuming that the annual factory capacity is 90,000 units, prepare a report for your CEO explaining your justification for the bid price that you came up with in 1 a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Mantel. Give both quantitative and qualitative support to your discussion.