eign competition. In the last business year (2020) the company produced its lowest profit in ten (10) years. The forecast for 2021 indicates that the present deterioration in profits is likely to continue. The company considers that a profit of $80,000 should be achieved to provide an adequate return on capital. The managing director has asked that a review be made of the present pricing and marketing policies. The marketing director has completed this review, and
AJ Ventures Ltd is a company engaged in the manufacture of water bottles which are bought mainly for sporting activities. Present sales are direct to retailers, but in recent years there has been a steady decline in output because of increasing foreign competition. In the last business year (2020) the company produced its lowest profit in ten (10) years. The
The company considers that a profit of $80,000 should be achieved to provide an adequate return on capital. The managing director has asked that a review be made of the present pricing and marketing policies. The marketing director has completed this review, and passes the proposals on to you for evaluation and recommendation, together with the Income statement for the year ending December 31, 2020 (see below).
AJ Ventures limited.
INCOME STATEMENT
For the Year Ending, December 31, 2020
|
Sales Revenue (100,000 Bottles at $10) |
|
|
$1,000,000 |
|
Cost of goods sold |
|
|
|
|
Direct Materials |
$100,000 |
|
|
|
Direct Labour |
350,000 |
|
|
|
Variable Manufacturing overheads |
60,000 |
|
|
|
Fixed Manufacturing overheads |
220,000 |
|
|
|
|
|
$730,000 |
|
|
Administrative Overhead |
|
140,000 |
|
|
Selling and Distribution Overhead |
|
|
|
|
Sales commission (2% of sales) |
20,000 |
|
|
|
Delivery cost (variable per unit sold) |
50,000 |
|
|
|
Fixed costs |
40,000 |
|
|
|
|
|
110,000 |
|
|
|
|
|
$980,000 |
|
Income |
|
|
$20,000 |
The information to be submitted to the managing director includes the following three proposals:
(i) To proceed on the basis of analyses of
(ii) To proceed with an enquiry that the marketing director has had from a mail order company about the possibility of purchasing 50,000 bottles annually if the selling price is right. The mail order company would transport the bottles from AJ ventures to its own warehouse, and no sales commission would be paid on these sales by AJ ventures. However, if an acceptable price can be negotiated, AJ ventures would be expected to contribute $60,000 per annum towards the cost of producing the mail order catalogue. It would also be necessary for AJ ventures to provide special additional packaging at a cost of $0.50 per bottle. The marketing director considers that in 2019 the sales from existing business would remain unchanged at 100,000 bottles, based on a selling price of $10 if the mail order contract is undertaken.
(iii) To proceed on the basis of a view held by the marketing director that a 10% price reduction, together with a national advertising campaign costing $30,000, may increase sales to the maximum capacity of 160,000 bottles.
d. A calculation of the minimum prices that would have to be quoted to the mail order company to
1. I. ensure that AJ ventures would at least break even on the mail order contract
1. II. ensure that the same overall profit is earned as in proposal (i) from the mail order contract.
1. III. Ensure that the overall target profit is earned, from the mail order contract.
e. A financial evaluation of proposal (iii)
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