CIMA Operational Case study

Mock Exam 3
Marici Power
Solutions
 Section 1 - Solution
From: Assistant management accountant
To: Volker Stein
Subject: New production line and marketing mix

Hi Volker,
I have prepared this information as per your earlier request regarding the
determination of the right production level for the new production line, the
government grant associated with the new line and the changes to be made to our
marketing mix in order to accommodate service delivery.

Task 1 – The payoff table

Marici Power is trying to make a decision on the batch size to produce for our brand
new product, the solar cells for solar vehicles. We would need to identify the batch
size that would be most financially beneficial to Marici Power given the uncertainty
we face about the demand of the new product. We can use three rules to make this
decision outlined below.

Maximin approach
This approach involves maximizing our minimum profit. In other words, we are
looking at the choice that has the best worst case scenario. In this case, the worst
case scenario for each market is when the demand is 20,000, as this is when the
lowest profits are made. Therefore we will choose the scenario that has the highest
profit in low demand conditions.

The minimum pay-off which is achieved when we produce 40,000 solar cells is
(F$5.5M), when we produce 30,000 solar cells is (F$1.25M) and when we produce
20,000 solar cells is F$3M. The decision maker would therefore choose to produce
20,000 solar cells under this criterion.

This approach is usually taken by highly risk averse organisations. They have a
pessimistic view of most situations and are willing to forego potential profits if it
means avoiding heavy failure.

Maximax approach
In this scenario we are looking to maximise profits by all means necessary, in other
words, maximising our maximum profit. In essence this is the most optimistic
position to take as it means choosing the batch which has the best possible outcome
assuming that the market conditions are as good as thy can be.
In this approach, the alternative that maximises the maximum pay-off achievable
under each alternative will be selected. The maximum pay-off under the production
of 40,000 solar cells is F$6,000,000, that of producing 30,000 solar cells is
F$4,500,000 and if we produce 20,000 solar cells the maximum return will be
F$3,000,000. The decision maker would therefore choose to produce 40,000 solar
cells.

Such decisions are entertained by high risk takers, who take the most optimistic view
of each situation. A high possibility of profit from the 40,000batch size market is the
key drawcard, despite the fact that a low demand will result in a loss of F$5.5m,
being the greatest loss in all conditions.

Minimax regret approach

This approach looks to minimise the amount of regret one might feel if a poor
decision is made. In other words, we are looking to find the option with the smallest
opportunity cost. We would use this approach if we were worried about making an
incorrect decision as it gives an indication of how much our profit will be affected
by the wrong decision.

If we decide to choose the 40,000 batch size and the demand turns out to be 40,000,
we will have no regret at all as we made the highest possible profit. If we end up
with a demand of 20,000 however, we will regret having chosen the 40,000 batch
size as we could have had a higher profit or lower loss from the other batches.

In this case we can actually quantify our regret; we know that we could have made
F$3M profit from the 20,000 solar panels but instead made F$5.5M loss from the
40,000 solar panels, therefore our regret amounts to F$8.5M (F$3M – F$(5.5) M).

The minimax regret approach looks to find the option that will minimise this quantity
of regret. The decision here is made using the opportunistic loss table which
calculates the regret of each decision.

From the table it is clear that producing 20,000 solar cells would lead to the least
regret because the highest regret we can experience would be F$3M while the 30,000
solar cells gives a maximum regret of F$4.25M and 40,000 solar cells a regret of
F$8.5M. The minimum of the four maximum regrets is F$3M.
Suitable rule for Marici Power
The information above gives three different decisions to the same problem. The
question of which is the most appropriate decision depends on the risk appetite of
Marici Power. If the board is optimistic that the demand will be 40,000 then the
40,000 solar cells under the maximax approach will be the best option.

If however, the board is skeptical and anticipates a 20,000 demand then the best
option using the maximin approach would be the batch of 20,000. In circumstances
where the board has no idea then the best option would be to limit any losses by
making the wrong choice, so the batch of 20,000 would be chosen.

Task 2 – Accounting for the government grant

There are two types of grant available. The first type is given to support capital
expenditure and is known as a capital grant. This is where a company buys or builds
(or otherwise acquires) a long term asset.

The second type of grant available is known as a revenue grant and these are
described in IAS20 as “Government grants other than those related to assets”.

Treatment in the financial statement

The impact on the financial statement of the receipt of a government grant towards
the cost of the new production line will depend upon whether the grant is classified
as a revenue grant or a capital grant.

The first general principle followed by IAS20 when determining the treatment of
grants is the concept of prudence. This concept tells us that grants should not be
recognized until the conditions for receipt have been complied with and there is
reasonable assurance the grant will be received. Which means we have to ensure that
we have availed 10 new jobs and spent the money on plant and equipment before we
can recognize it.

The second general principle is the accruals or matching concept. This concept tells
grants should be matched with the expenditure towards which they were intended to
contribute. IAS20 allows two different treatments for revenue grants. These
treatments apply after the grant has been recognized.

Broadly speaking if the grant is a revenue grant then it will effectively be expensed
to profit or loss to match with the costs incurred as a result of the project for which
the grant was given (likely to be the costs of the employees and training).
If the grant is capital in nature then it will be included in the statement of financial
position and only released to profit or loss to match how the cost of the new
equipment affects profit.

On the basis that we conclude that this is a capital grant then there are two alternative
treatments that could be adopted in the financial statements.
The first is to credit plant and equipment with the grant, in effect reducing the cost
of the asset in the financial statements and reducing future depreciation charges. The
second is to treat the grant as deferred income within liabilities and release an
element each year to profit as the same rate at which the asset to which it relates is
being depreciated.

Ultimately both methods have the same effect on profit which is that only a
proportion will be released to profit each year. Therefore, if it is deemed a capital
grant, then we will not be able to record the whole amount as income on receipt.

On the basis that we conclude that this is a revenue grant, then again there is a choice
of how it is recorded, although ultimately both methods will increase profit in the
year of its receipt. The choice is really just a presentational issue in that it can either
be shown as income or it can be netted off the related expenditure.

Task 3- Marketing mix

The marketing mix is a business tool used in marketing by marketers. The marketing
mix is often crucial when determining a product or brand's offer and the traditional
mix is often associated with the four Ps, price, product, promotion and place. In
service marketing however, the four Ps are expanded to the seven Ps, people,
processes and physical evidence.

People
Service businesses such as consultancy invariably have a high person-to person
contact. Therefore it is vital that we focus on the need to instill values of quality and
reliability and generate a service ethic in our staff who are the interface between our
customers and our business.

In order to achieve this focus on the achievement of excellence and a strong customer
orientation we need to invest in our staff via high quality training. In particular
customer facing staff must be selected, trained and motivated with a major focus on
customer care and public relations.
The physical presence and appearance of people performing services such as our
reception staff and consultants is a vital aspect of customer satisfaction. Such staff
are performing a service and also liaising with our customers to promote the services
that we offer, gather information and respond to customer needs.
We need to ensure that that our staff have the range of skills and knowledge to
support the services that we offer and that there are staff uniforms available to give
a professional image at the office. For example our reception staff should wear suits
or corporate uniform and be trained in upselling, encouraging our clients to use our
services.

Processes
These are the systems through which our services are delivered and used to support
our customers’ interaction with us. We must recognize that efficient processes can
create a marketing advantage for Marici Power. If our booking and attendance
process is made as efficient as possible then clients’ first and last impressions of
Marici Power will be favorable and create customer value’ which can lead to further
bookings and higher revenues.

Other processes such as our on-line bookings process should be streamlined and
create a favorable impression to our potential guests. Customers need to be
completely satisfied by such important processes (for example, the security attached
to the making of on-line payments).

We should undertake periodic reviews of our processes for their level of efficiency
paying particular attention to issues such as queuing and waiting times and the
accessibility of facilities, premises, personnel and the services that we have on offer.

Physical evidence
Physical evidence relates to how our products and services are perceived in the
market place. The physical evidence of our service provision can be incorporated
into the design and specification of our service environment by designing our
premises to reflect the quality and types of service that we offer.

In this regard we should give consideration to environmental factors such as fixture

and fittings, decor, colour schemes, noise levels, background music, fragrances and
general ambience.
Thus physical evidence embraces the comfort and facilities that we have on offer. A
critical component of the provision of physical evidence is our website which must
be well designed in order to facilitate easy navigation by both existing and potential
clients. We should recognize that our website will frequently give potential
customers their first impressions of our business.

I hope I have addressed all your concerns, should you require any more information
you can contact me.
Kind regards
Assistant Management Accountant

Section 2 – Solution
From: Assistant Management Accountant
To: Maria Coleman
Subject: Supplier problems and ABC system

Hi Maria,
I have prepared this information as per your earlier request regarding the problems
we are facing with our sole supplier of silicon and the implementation of an ABC
system in Marici Power.

Task 1 – Decision to close down the production line

Principles used in the calculations schedule as a basis for decision to close the
production line – suitability and impact of changing With regard to the costing
schedule produced the following observations are relevant.

With a volume of 50 batches of cells produced over the three month period this
would generate a gross profit before the additional marketing costs of F$ 250,000,
as shown in the schedule. After the marketing costs this would in effect be a loss of
F$ 550,000 and on this basis it would appear that shutting the production line down
would be the best decision.

However, given that we will still need to cover the fixed production overhead (and
probably still have to pay at least an element of direct production labour) then the
decision should be based on an assessment of the contribution that we could earn
from these products rather than the gross profit.

Taking the contribution generated instead of the gross profit the calculation
becomes:
Total contribution of F$8.5Mafter the marketing costs this would in effect leave a
net positive contribution of F$7.7M (F$8,500,000 – F$800,000) towards the fixed
production overhead costs that would be incurred. As such it is better to run the plant
and generate this contribution towards the production overheads, which will have to
be paid anyway.

The basis for this decision is that as long as there is positive contribution (sales value
less marginal cost) generated towards fixed production overheads, any level of
production generating positive contribution will be acceptable.

The level of contribution generated will vary with the sales volumes and prices
charged, it may be that the alternative material proves more popular and sell in higher
volumes, or that higher prices can be charged and the budgeted volume still
achieved, resulting in a higher gross profit, or the same gross profit but at lower sales
volume.

The extent to which production overheads are truly fixed, will depend on the nature
of the overhead costs, in the long term all costs are variable, and in the short term all
fixed. This will depend on the time span of the decision process. In this instance
running the plant is the only viable decision.

Task 2 – Multi-sourcing
Marici Power is currently dependent on single sourcing, where we use one supplier
for our silicon. This has helped us maintain reliable quality throughout, although the
recent incident with our silicon supplier has revealed that this might not be an ideal
strategy.

We might need to use multiple sourcing which enables us to buy from a variety of
suppliers, not just one. This method does come with its advantages and
disadvantages as outlined below:

Benefits of multi-sourcing

Greater security of supply

If we were reliant on a single supplier then if there are problems with that supplier
(perhaps as a result of a disaster at the supplier such as a fire) then it could seriously
disrupt production. We need a constant supply of silicon cells and cannot make any
solar panels without it; hence it is important that supply is consistent.
By having a number of suppliers, if there is a problem with one supplier we can
easily switch to one of our others to ensure the continuity of production.

Pressure on suppliers to become competitive

In an environment where we purchase all our silicon cells from a single supplier,
then it gives the supplier high bargaining power. They no longer aim to beat our
competitors in their area of expertise to emerge the best, they become too
comfortable as our soles supplier that they stop trying to impress us. This would not
be the case if we use multiple supply system were suppliers will have to compete on
both quality and price.

Updated supply market information

Currently we rely on what the supplier has available, we have no desire to know
more about what the rest of the supply market is offering. However, if we were to
shift to a multiple sourcing arrangement, then we will be encouraged to look for
more in the nature and type of products that we source.

For example, our customers are fast becoming concerned about lighter solar panels
that absorb heat faster which would force us to find suppliers that are operating in
accordance to this.

Challenges of multi-sourcing

Loss of economies of scale

Multiple sourcing would mean that we split our orders and order from various
suppliers where we would normally source from a single supplier. This will result in
a possible loss of volume discounts that we used to get as a result of bulk buying
under single sourcing. The effect of this might be compensated with the competitive
pricing that results.

Loss of customer-supplier bonds

Focusing on a single supplier has enabled us to build bonds over time with our
supplier. The multiple sourcing strategy is a traditional approach based on price and
it is not easy to form similar bonds in this case. Suppliers are constantly changed
depending on who the cheapest is at that time. The greater the number of suppliers,
though, the harder and more time consuming it becomes to form bonds.
Difference in commitment levels and quality
The basis of single sourcing was consistency in quality, which is vital if we are to
produce competitive quality products. Sourcing from multiple suppliers might result
in supplies of different qualities being delivered which would obviously affect the
quality of our final product. Some of the suppliers might have a large customer base
which would make it difficult for them to be committed to us completely.

Task 3 - Activity based costing

When commenting on the effectiveness of the current OAR I was thinking in terms
of accuracy for costing our products. Taking a wider view, the current costing system
and OAR offer very little information to help with the control of costs. The current
system does not even identify costs with departments or processes.

If we implemented an activity based costing (ABC) system we would have better

information about where our costs are, what causes them and therefore how to
control them. This would offer many benefits: more accurate costings, better
planning, and cost control and reduction.
This is particularly relevant now that we are adding the cells for solar cars to our
product range. I have been speaking to the Production Director about the printing
phase. During printing, the cells are move in trays in batches of 200 in each bay.

On the surface it would appear that seeing as each cell spends the same amount of
time in the bay, the current system of absorbing overheads using labour hours was
effective.

However the Production Director went on to reveal that there are more costs
involved than simply printing metals on the cells. In addition to the direct labour of
the workers who print the cells there are two teams of indirect workers. These are a
substantial cost.

One team of workers set up the bays for each batch of cells. The more times that a
bay needs to be set up for a new cell shape the higher the cost incurred. Now that we
know this we can try to plan and control our costs better. For example if we could
increase the size of the bays that would mean we would need less set ups.

The other team is needed whenever there is a metal change, whenever we print cells
using different metals we incur more costs. But knowing what has caused the costs
would mean that we could charge those specific costs to the appropriate products.
Also knowing that costs are caused by metal change could help us reduce costs now.
Consider a recent job: 3,000 cells were printed using five bays. Each bay was told
to print 200 cells in each of the three metals we use. This will have caused 15 set up
and 15 metal change activities. Given that currently the bays can only hold 200 cells
there is not much we can do about the set up costs. But look at the metal changes!

Now knowing that a metal change causes costs it would be better if we had allocated
the job to 3 bays with each bay printing one metal. This would have resulted in the
same 15 set ups but only 3 metal changes. For this job that would have been an 80%
reduction in the metal change costs.

As you can see having the information about what activities cause costs will help us
plan better, control costs and also charge costs to products that cause the costs.

For example if a product manager decides that we should offer a particular cell in a
range of metals, the ABC system would ensure that the extra costs incurred by
having to do the metal changes would get charged to that specific model.

The ABC system would make the costs and what causes them more transparent and
allow more accurate costings that reflect the resources consumed by the products.

I hope I have addressed all your concerns, should you require any more information
you can contact me.
Kind regards
Assistant Management Accountant
 Section 3 - Solution
From: Assistant Management Accountant
To: Phillip Jorgenson
Subject: Bottlenecks and areas of business

Hi Phillip,
I'm sorry to hear that the Zurg project is proving to be problematic and hope we can
resolve the problem quickly and simply. With this in mind I have produced the
information which you requested:

Task 1 – The theory of constraints

Looking at the information you have provided, it's clear that we are dealing with a
bottleneck in production, and I suggest we use the theory of constraints to help us
actively eliminate bottlenecks in the future. The theory of constraints is a concept
that states you can only produce products as fast as your slowest department will
allow.

The slowest department or part of a process, often referred to as the ‘bottleneck’ is

understood to set the pace of the entire operation. Therefore the way to improve
efficiency is to remove the bottleneck, after which a new ‘slowest department’ will
emerge that will become the new focus, and the new bottleneck. As such, once we
eradicate one problem, Marici Power should look to identify and eliminate the next
new bottleneck.

Theoretically, this process leads to a culture of continuous improvement

(continuously working to improve the next bottleneck until resolved) which helps to
optimize the production process.

That said, bottleneck improvement may require investment, and this could be
potentially problematic given Marici Power's limited access to funds.

Bottlenecks are an essential concept in throughput accounting and managers will

always aim to remove them. However, this is not always immediately possible,
therefore throughput accounting (TA) also aims to maximise profit by focusing on
maximising the efficiency of the bottleneck in the process.

In throughput accounting, the short term action is to optimize the output of the
bottleneck and the long term action is to remove the bottleneck. Accordingly, if we
were to adopt throughput accounting we would be able to target bottlenecks without
an immediate requirement for capital Marici doesn't have.

The costs in throughput accounting differ from marginal costing (which considers
labour, materials and variable overheads to be variable costs) in that it considers
material costs to be the only variable cost. All other costs, including direct labour,
are treated as fixed.
Therefore TA identifies costs as either variable costs (direct materials) or conversion
costs which include all other operating costs, such as labour, overheads, rent, utilities
etc.

Marici Power's Bottlenecks

Having analyzed the information which you sent me, it is clear that most departments
operate at a production capacity of roughly 40 solar panels per hour, with the notable
exception of polysilicon inspection. This is to be expected, as inspection is done
based on a sample of each delivery and not the entire delivery.

That said, our packaging department currently produces only 21 panels per hour, or
roughly 50% of the capacity of many of the other departments. I would therefore
suggest that packaging is a key bottleneck which needs removing. As the department
has had significant investment in line with every other department, I do not believe
that the investment of further funds would resolve this bottleneck.

That said, the department has significantly lower numbers of staff then many other
departments, and this may be contributing to the problem. Given that chemical
processing has an unusually high number of staff, and are processing solar panels
much faster than most other departments can keep up, I have one crucial
recommendation.

We should retrain a number of members of staff from the chemical processing

department in order to work in packaging. This should then hopefully boost the
productivity of our packaging department and ease the bottleneck.

In the long term, it may be that we need to increase the level of automation and
mechanization in the packaging department in order to bring production capacity
completely in line with other departments.

The critical idea with the theory of constraints is that our elimination of bottlenecks
should be an ongoing process. This means that once the production capacity of the
packaging department is above a satisfactory level of say, 40 panels per hour, we
would then investigate how to improve the production capacity of heat processing
to a similar level.

Task 2 – Mintzberg's model

Whilst I think it's important to remember that all staff do not necessarily need to
understand everything about a business, understanding the key areas can help moral
and productivity.

Academic Henry Mintzberg identified 5 key areas of a business, each with their own
unique contributing factors towards effective production and operations. Mintzberg
defined an organisation's design structure as: “The sum total of the ways in which it
divides its labour into distinct Tasks and then achieves coordination among them.”
I'll now briefly overview his model, and explain what this means for Marici Power.

The Model
Mintzberg's model is a good way to show how the parts of an organisation are
connected. This can help when determining the relative balance needed for the
organisation to be successful.

Strategic Apex
The strategic apex controls the direction and strategy of the firm. People here are
usually at the senior level of management, and would include yourself as well as the
other directors. Only people at this level have access to all of the business's sensitive
information.

Middle Line
The middle line is usually made up of middle and lower levels of management. They
are the link between the strategic apex and the operational core. They take the
strategies of the strategic apex and turn them into Tasks and jobs that can be
designated to the operational core.

Accordingly, having an effective line is an essential part of operational staff feeling

connected to strategic staff, and working towards the same objectives. In our
business model, middle line staff may include factory shift supervisors and the
managers of individual functions such as purchasing or logistics.
Operational Core
The operational core carries out the day to day Tasks such as sales, producing
products and providing services. Accordingly, most staff are likely to be members
of the operational core. Although these members of staff have restricted access to
information and decision-making power, they are absolutely vital to the business's
effective functioning.

In Marici Power, all production operatives would be in this business area, along with
other roles such as drivers.

Techno structure
The technostructure consists of analysts who decide on the organisation's technology
and procedures. The aim of the technostructure is to standardize procedures. An
example of the technostructure would be a human resources manager whose aim is
to standardise the appraisal process across the organisation using standard appraisal
forms and procedures, and training people in how to apply them.

Within Marici power, our technostructure is reasonably limited, although Volker

Stein, as production director, has a reasonable influence in this area. It may be
something which is worth expanding in the future.

Support Staff
Support staff are those who work outside of the core processes in an organisation.
This would include public relations, legal services and R&D.

Given the importance of research and development in the solar industry, we have a
particularly large number of support staff, and should be aware that this is likely to
be an abnormally high wage cost. It will also be important to ensure that support
staff feel related to the core functions of the business.

Ideology
Ideology is not one of Mintzberg’s 5, but it is often added as an additional point to
Mintzberg's model so it's a good one to know in this context. Ideology refers to the
beliefs and traditions that make up the culture of an organisation. The culture can
affect the operations of an organisation, and therefore it is a key area of a business.
Recommendation
The reason that ideology is often added to Mintzberg's five is because it is extremely
important. If I were therefore considering the ways in which we could maintain full
engagement between staff and the culture at Marici, it would be through a well-
enforced ideology.
This should be apparent from the earliest stages of engagement, with new staff
receiving welcome packs outlining the company's beliefs as well as regular meetings
and staff publications surrounding the company's progress towards our ultimate
goals.

Task 3 – Payrise
Regrettably it is extremely unlikely that the pay of any Marici Power employees will
rise in the near future. This is because the company is likely to experience falling
sales as a result of cuts to subsidies and tariffs, as was experienced by industry giants
such as SunEdison before their bankruptcy.

It is therefore likely that there will be widespread redundancies, and it would be

unethical to be raising the wages of some staff whilst others lost jobs. Maintaining
wages may risk staff moving to other firms, given that the solar industry is an
extremely competitive labour market, but I believe that this is ultimately unlikely
given that subisidy cuts will affect all solar companies across Freeland.

I hope I have addressed all your concerns, should you require any more information
you can contact me.

Kind regards
Assistant Management Accountant
 Section 4 - Solution
From: Assistant Management Accountant
To: Maria Coleman
Subject: Audit results
Hi Maria,
Please find the attached information which you requested below:

Task 1 - The pillars of accounting

Reliability
A financial statement isn't much use at all if it doesn't show the truth of the financial
position or performance of the company. A company may be on the verge of
bankruptcy, but could arrange their statements in a way that makes them looks
profitable. Our accounts are unreliable if labour costs are being recorded incorrectly
and our costing methods are suspect.

Transparency
The pillar of transparency is the principle of openness. If your business is a room,
then the financial statements are the window into that room, and the clearer they are
the better that your potential investors can see your business as it really is.

If auditors found Marici's accounts confusing, it is extremely unlikely that less

experienced readers including stakeholders such as employees would understand
them!

Consistency
Now, investors might take one look at your financial statements, see that you've
made big increases in profits, and consider you to be a good investment. However,
the overall position hasn't actually changed that much over the year if you've
changed the way you present the information!

This is why it's so important for financial statements to be consistent each year. If
different techniques and methods are used each time you produce a statement, then
the statements may show significant changes that don't actually represent real life
changes! Whilst auditors found many faults with our accounts, at least we were
consistent in our wrong approach!
Comparability
Our final pillar is comparability. Why is this important? Well, let's consider how
useful the statements of a company would be if it was a company policy to produce
financial statements every 47 weeks rather than annually like everyone else. All
comparisons between this company and the rest of the industry would be a waste of
time, since the information does not cover the same time period.

And so we quickly see how financial statements that do not support comparison are
not of much use to anyone, company nor stakeholders. We should investigate what
accounting standards are in place in Freeland aim to be fully complaint so that Marici
Stakeholders can get the widest possible usage from our reports.

Task 2 - Types of relevant costs

Future cash flows

Relevant cash flows are always related to the future and there must be an actual cash
flow associated with it. For instance the purchase of new materials on a construction
project are a future, relevant cash flow as without the project we would not be
purchasing the material.

Incremental costs
Any increase or decrease in future cash flows as a result of a decision is a relevant
cost. For instance, staff are not always a relevant cost. Full-time employed staff
working on a project would be paid whether a particular project was in place or not
and so is not deemed ‘relevant’.

However hiring temporary staff to work on a specific project is an incremental

relevant cost of this project, so it must be included.

For example, if panel production increases by 50% due to a number of

Utility-scale orders, the permanent staff working on these projects are not a relevant
cost, whilst any agency staff needed to cover the increase are an incremental cost.

Opportunity costs
Opportunity cost is the benefit sacrificed (lost contribution) by choosing one
decision over another. For example, if we have a choice between undertaking two
supply contracts at the same time and may only choose one, the one which is rejected
is the opportunity cost.
Avoidable costs
A cost which can be avoided is relevant as it is affected by the decision being made.
The costs of materials is a good example of this. As we didn’t have to buy the
materials, we avoid that cost and hence it is a relevant cost– so must be included in
our calculation.

Sunk costs
This cost has occurred in the past and therefore is no longer relevant as the money
is already spent. A homebuyer who has had a survey done on a property before
deciding if they are going to purchase it should not take the survey cost into account
when making their decision. The survey cannot be undone, it is past and has
happened and therefore no longer a relevant cost when evaluating whether or not to
purchase the property.

When considering a new project we should class purchased polysilicon as a sunk

cost, this is because we have already paid for it and we own it. Therefore it should
have no bearing on any future decision making.

Committed costs
A committed cost is a future cash flow, but one which will be incurred irrespective
of the decision being made and so is not relevant to the decision making process.
Rental costs are often an example of committed costs.

If we are tied into a 2 year rental lease for a polysilicon processing machine, that
cost is not relevant to the decision of whether or not to go ahead and undertake a
new project that will last just a few weeks. The lease amount is committed already
and cannot be changed and so is not relevant to the decision.
Allocated costs
Costs are often allocated from another part of the business, for instance, for the use
of central services. As these costs are incurred by the business as a whole irrespective
of whether a project proceeds or not, they are not relevant to the decision on that
project.

If we consider that our research and development staff need keeping up to date with
the latest legislation and this training is compulsory and allocated to the department,
this cost will be incurred irrespective of the projects undertaken by another
department and therefore is not relevant for their internal decision making processes
such as which new product to produce.
Depreciation and Amortisation
As relevant costs only deal with cash flows, depreciation and amortisation are also
considered irrelevant costs. They are just accounting adjustments – not cash coming
in or out of the bank account.

Stages of purchasing
John Dewey outlined the stages of typical purchasing behaviour in 1910, and I have
outlined them here with reference to Marici Power.

Problem/need-recognition
Problem/Need-recognition is the first and most important step in the buying
decision. Without the recognition of the need, a purchase cannot take place. The
need can be triggered by internal stimuli (e.g. hunger, thirst) or external stimuli (e.g.
advertising). As such, Marici advertising explaining that our panels can save people
money may appear at this stage.

Information search
Consumers next seek to find the best solution, and research the information on the
possible products that might fulfil the need. A marketer needs to ensure they provide
all the information the potential customer needs in a way that highlights the
advantages to the customer over competing products.
Accordingly, Marici advertising may either explain the environmental or financial
benefits of solar above competing panels and competing forms of energy such as
wind.

Evaluation of alternatives
At this stage, consumers evaluate different products/brands in order to establish
whether these can deliver the benefits that they are seeking.
Marketers must ensure their products compare favourably to alternatives.

As we know, price and efficiency are the major things which consumer’s care about
when purchasing solar panels, as indicated by the excitement surrounding the record-
breaking efficiency of the Insolight solar panel developed in Switzerland in
September 2016.

Purchase decision
This is the fourth stage, where the purchase takes place. The product must be easily
available (e.g. in a local store, or online), and the process easy and simple. Much of
this stage currently relies on our distributors, but could be improved through
partnership with major retailers, as happened with London firm SolarCentury and
Ikea.

Post-purchase behaviour
Customers compare products with their expectations and are either satisfied or
dissatisfied. This can then greatly affect the decision process for a similar purchase
from the same company in the future. On the basis of either being satisfied or
dissatisfied, a customer will spread either positive or negative feedback about the
product.

At this stage, companies should carefully create positive post-purchase

communication to engage the customers. That said, we are extremely likely to
benefit from repeat trade from domestic customers, who only need one set of solar
panels. Our priority should therefore be providing the highest possible level of
service and quality to installers.

I hope I have addressed all your concerns, should you require any more information
you can contact me.