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Kultur Dokumente
i.
Secconz is CCs biggest customer in Singapore and Secconz also the only
local company in Singapore that they sold their major product called FFA (Fuzzy
Frost Alpha System) apart from other part supply. Mr. Nelly from Secconz asked Mr.
Dali, the Managing director of CC to reduce the selling price of CCs products. If Mr.
Dali did not fulfill Secconz demand to reduce the price, CC may lost their local
business because Secconz was their main customer that had been contributed to the
company profitability for the past two years as they did charged Secconz with high
price on the product supply. Their other market is in Europe, however the price for
exported product is much cheaper as compared to Secconz as they want to compete
with international market. Obviously, they may loose their local market at any time,
as their only customer is no longer doing business with them. It would be hassle to
find new agreement with other customer as if Secconz decide to manufacture FFA in
house, it will affect the CCs business in long run and Secconz become their new
competitor in the market. In the other hand, if they follow the Secconz demand to
reduce the price, their profitability may decrease. Therefore, they have to plan new
strategic planning to maintain the same profitability.
ii.
The Chinas authority visited their plant in China in connection with Antidumping activities. This is due to the US International Trade Commission has begun
investigation on their export from China to US in which they claimed that the pricing
for CCs product are much lower than the fair value. Anti-dumping that investigated
by the officer is intended to discourage importation and sale of foreign-made goods
at prices substantially below domestic prices or is below its cost of production for the
same items. If the government officer found their plant in China to be guilty, they will
either have to ceased their operation or will be imposed to pay a huge anti-dumping
tax on them. It will be the biggest impact for CC as their business may bankrupt
because their plant was ceased to operate and unable to do the production process.
In the other hand, if they are not asked to close down the operation, they have to pay
a huge anti-dumping tax. Furthermore Mr. Rithisak wants to solve the problem by
giving a bribe to the investigation officer.
2.
POTENTIAL ACTIONS OR RECOMMENDATIONS TO SOLVE THE
ISSUES
i.
Current action
CC should agree to lower the price of product supply to Secconz. This may
reduce CC profitability in a short run, however CC still can cover their production cost
and get their desired profit in a long run. Therefore, to secure their future business
relationship with Secconz, along with the price reduction, CC should make long-term
agreement with Secconz to ensure CC profitability in long run and to mitigate their
risk and exposure for future sustain in the business. Current selling price is $140; let
say the selling price reduce to $135. The sales margin will be reducing by 0.7% and
return on investment will be reducing by 1.5% only. It may reduce the expected
annual sales by $125,000 only. This will be elaborate further in the feasibility analysis
on cost versus profit under financial calculation on the next pages.
Future action
Since Cold Cuts tend to sell the same product and reduce selling price, Cold
Cuts must deduct the cost of the operation department such as reducing employees,
specially the salaries of indirect employees such as plant managers, foremen,
supervisors and quality control inspectors. Thus, they are still able to maintain their
profitability, as lower costs would be reflected in a higher profit margin. If Cold Cuts
could lower their cost, they have a strategic advantage in a competitive price war,
they have the ability to undercut their competitors by cutting prices in order to gain
market share. For example by reducing factory overhead by $4 per unit, the total cost
will reduce to $54 per unit at the new selling price of $135. Cold Cuts can improve
the sales margin from 48.06% to 49.3% percent, as the increasing total margin from
$4,025,000 to $4,125,000. (The details will be elaborate further in the next pages). In
short, by reducing selling price to RM135, it will help Cold Cuts to build good
relationship with Secconz as both company will commit to more modest and flexible
pricing models for long term contracts in order to mitigate their risk and exposure.
Other financial analysis should be done on other cost that could be cut to
maintain the same profit as if the price is not increased. For example lowering the
transportation cost whereby CC may ask Secconz to provide their own transport to
pick up the FFA system since Secconz is the only local customer that CC sold their
FFA. Furthermore, to lower the administrative cost could also be done. CC needs to
search for new local customers for FFA system; this is to safeguard the business by
having other business relationship apart from Secconz.
ii.
Current action
Mr. Dali, along with the finance manager and the accountant should seat
together to discuss on this matter. They should have proper plan on how to answer
the officer queries in relation with anti-dumping activities to ensure that they are not
guilty. They should explain to the officer on how they can come out with that pricing
strategy for Europe market as on the group basis the machines have already been
written down. If possible Mr. Dali should send their accountant to China to answer
regarding this issues. In the other hand, Mr. Dali should advice Mr. Rithisak for not
giving a bribe to the authority as giving a bribe is illegal and may create other
dangerous impact to the company business and reputation, and it is unethical
behavior.
Mr. Dali should also prepare with the possibility of being imposed to pay a
huge anti-dumping tax. By getting ready, they may saving money for this
circumstances and they may ready to account for contingent liability in their financial
statement in case, they are found guilty in anti-dumping activities. Furthermore, they
should alert with worldwide current issues, as their market is international. They
should alert with issued raised by European Union and World Trade Organization
(WTO) in relation with anti dumping agreement to ensure the authority is conducting
their inspection in relation with fair value comparison as stated by WTO rules on AntiDumping Agreement.
Future action
Many developing countries nowadays are very strict with anti dumping
activities as the dumped imports are causing injury to the their economic country.
Therefore, to future sustain in the market, CC should increase the price for their
international market, this is to avoid any legal action towards them in relation with
anti dumping activities. They should make research on the international average fair
value price in fixing the pricing strategy of their product. The price should be in the
range of international average fair value of the same product and it should not too
lower that can trigger the foreign authority to investigate their plant in China.
By increasing the selling price, CC may increase their profitability, as the
margin is increase. To attract potential buyer, they should produce a quality product
that beyond the average standard. Enhancing after sales services and continuous
improvement in their production could also be done to stay competitive in the market,
as lower pricing strategy to enter the market is not relevant anymore in their product.
3(a)
FINANCIAL ANALYSIS
Per unit
(S)
Per unit
(S)
135
40
10
50
8
58
77
$8,375,000
Margin
Secconz = 25,000 units X $77 = 1,925,000
European = 50,000 units X $42 =2,100,000
TOTAL MARGIN
$4,025,000
$5,000,000
$2,100,000
Situation 1
Situation 2
Original Situation
(Price @ $135)
(Without Seconz)
(Price @ $140)
$8,500,000
$8,375,000
$5,000,000
$4,150,000
$4,025,000
$2,100,000
$4,150,000/$8,500,0 $4,025,000/$8,375,0 $2,100,000/$5,000,0
00
00
00
=48.8%
=48.06%
=42%
$8,500,000/
$8,300,000
=102
$8,375,000/
$8,300,000
=101
$5,000,000/
$8,300,000
= 60
4,150,000/
$8,300,000
=50%
$4,025,000/
$8,300,000
= 48.5%
$2,100,000/
$8,300,000
=25%
Secconz is a major customer of Cold Cuts, losing of Secconz will give a big
impact to the financial of the company especially in their revenue. By looking at the
above comparison, the revenue will drop about one third in which $3,500,000
(25,000 units@$140) of the existing revenue stream and it will affect the company
profit margin. The sales margin is greater if Cold Cuts going to reduce the price lower
to Secconz rather than they stop supply FFA to Secconz. It only reduces by 0.7% as
compared to 6.8% reduction in sales margin if they stop business with Secconz. A
low sales margin means that the business generates a low level of revenue to pay for
operating expenses and net profit.
The Capital Turnover measure of how well a company uses its equity to
generate revenue. The higher the ratio it is, the more efficiently a company is using
its capital. Capital turnover drop from 102 to 60 if Cold Cuts stop selling to Secconz,
it show that Cold Cuts not utilizing its working capital to support a given level of
sales.
The ROI of 48.5% is almost reached ROI 50% from original selling price,
$140. It would tell us that for each dollar invested on the average, the segment is
generating about 48.5 cents of profit that increased the value of the whole company.
If an investment has a positive ROI and there are no other opportunities with a higher
ROI, then the investment should be undertaken. Hence, Cold Cuts should continue
keep Secconz as client so that they need to fulfill Secconz order to reduce the selling
price as they are CCs main client.
ii.
Since Cold Cuts tend to sell the same product and reduce selling price, other
alternative that should be undertaken by Cold Cuts is to deduct the cost of
production. For example to deduct the cost of operation department such as by
reducing employees, especially the salaries of indirect employees such as plant
managers, foremen, supervisors and quality control inspectors. Thus, they are still
able to maintain their profitability, as lower costs would be reflected in a higher profit
margin. Lower cost firms also have a strategic advantage in a competitive price war,
they have the ability to undercut their competitors by cutting prices in order to gain
market share. For example, Cold Cuts can improve the sales margin from 48.06% to
49.3% by reducing the factory overhead of $4 per unit, whereby the total cost will be
reduce to $54 per unit at the reduce selling price of $135. The total margin will be
increase from $4,025,000 to $4,125,000, and the revised ROI will be:
In short, by reducing selling price to RM135, it will help Cold Cuts to build good
relationship with Secconz for future business sustainability, as both company will
commit to more modest and flexible pricing models for long term contracts in order to
mitigate their risk and exposure.
3(b)
i.
QUALITATIVE ANALYSIS
SWOT Analysis
b. Weaknesses
Specializing
in
refrigeration
components. The company developed
its own brand of refrigeration process
technology known as Fuzzy Frost
Alpha system (FFA)
Their FFA product has a good
quality as compared to other plant
produce in China
Their products were exported
worldwide
c. Opportunity
The
continuous
business
relationship with Secconz will give
another profitable year for CC since
Secconz is their main customer.
CC will able to upgrade FFA
technology and consider investing
new advanced technology to capture a
new market as well as meeting the
expectations of Secconz.
d. Threat
Recommendations
It is obvious from this analysis that the main weaknesses of CC is in term of
the price that they charged to Secconz. Since CC wants to retain Secconz as their
main customer, they should consider offering the product in a lower price to Secconz
by reducing the cost of factory overhead to maintain their profitability. This is also to
avoid Secconz from producing their own similar technology in house where they
might end up being the competitor to CC in the future. In addition, the strength of CC
is that they are having the FFA technology that makes them outstanding from other
competitor.
ii.
Balance Scorecard
Initiatives
Cutting
overhead
cost
in
manufacturing and revise the
pricing strategy. It means that
CC have to increase the price in
the Europe Market to avoid antidumping tax levy and at the
same decrease the price in local
market for continuous sales
growth.
ii.
Customer
Customer
satisfaction
perspective
measure,
number
of
What
do
our regular customers retained
customer
requires
from us and how are
we doing according
to
these
requirements?
iii.
Internal Business
perspective
To
satisfy
our
stakeholders, what
must be our levels of
i.
Objectives
Financial
perspective
What must CC do to
create sustainable
economic value?
Includes
measurements
for innovation, operations.
(Utilize
innovation
to
advance and improve
internal processes to keep
productivity,
efficiency
quality?
iv.
employee
retention, training, skills,
morale
and
Recommendations
By using Balance Scorecard (BS), it provides a clear prescription as to what
CC should measure in order to 'balance' the financial perspective and how to
maintain a longer relationship with Secconz. One of it is to reduce the selling price of
the product as requested by Secconz. Furthermore, BS enables the executives in CC
to truly execute their strategies by identifying what should be done and measured not
only in financial perspective of CC but also focus on the customer perspective,
especially Secconz and internal business growth.
References
Management Accounting 6th Edition. Langfield et al. McGraw Hill (2012)
http://www.shell-livewire.org/swot-analysis/
http://smallbusiness.chron.com/advantages-balanced-scorecard-59821.html
http://thebalancedscorecard.com/benefits_bsc.htm
http://www.scribd.com/doc/128342447/Dumping
http://www.studymode.com/essays/a-Case-Study-On-Cost-Estimation-1090770.html
http://www.inpaspages.com/anti-dumping-law-affect-steel-industry-business/