CASE 5 : FREEZING OUT PROFITS

Prepared For : Sir Amirul Hafiz Bin Mohd Nasir

Group Members :
Liyana Binti Mohd Khair (62288112104) Faraizuwana Iskandar (62288112103) Mohd Rahmat Bin Rusli (62288112041) Mohd Nur Shukri Bin Mohd Nizar (62288112240) Muhammad Shyazwan Bin Ramli (62288112139)

EXECUTIVE SUMMARY
Cold Cuts Ltd. that is better known as CC was a

manufacturing concern in Singapore specialising in refrigeration components. Develops its own brand of refrigeration process technology known as Fuzzy Frost, and their products were exported worldwide. CC was essentially a subcontractor of components for customers who were original equipment manufacture (OEMs).

Cont.
Mr.Dali, the Managing Director of the CC had a meeting with Mr. Nelly, the Supply Manager from their biggest customer which is main customer in Singapore, Secconz an original equipment

manufacturer of refrigeration products. Mr Nelly informs that they are notice that the price the CC charge to them is over the material cost. He expected CC to reduce the price since that they have a lot of competition from China who have been able to produce a product like them at much cheaper prices.

Cont.
Mr. Rithisak, the Plant Manager in China which is a new

venture that CC had just begun the year before says that a contingent of their trade officials have gave them a surprise visit. That the United States International Trade Commission has begun investigations on exports from China to US CC is pricing their products much lower than the fair value. They say if they find them to be guilty they will either close down this company or at the very least levy a huge anti-dumping tax.

MAIN CHARACTER IN FREEZING OUT PROFITS

COLD CUTS LTD (CC) Singapores only refrigeration parts manufacturer -Mr .Dali : The Managing Director SECCONZ The biggest customer of CC, an original equipment manufacturer of refrigeration products. - Mr .Nelly : The Supply Manager OTHER - Plant manager in China, a new venture that CC had just begun the year before. - Mr .Rithisak

ISSUE

SOLUTION &

RECOMME NDATION

st 1

Issue

ISSUE
1st Issue

Mr .Nelly expected COLD CUTS LTD (CC) to

reduce the price since that they have a lot of competition from China who have been able to produce a product like them at much cheaper prices.

SOLUTION
1) Cutting overhead cost in manufacturing and revise the pricing strategy

To help decrease your overhead costs when it comes to manufacturing is to reduce the amount of products that you have in inventory. The reason that this will lower your inventory costs is because you will only be making the products as your customers want to purchase them.

Cont.
To implement some kind of a manufacturing process, such as lean manufacturing or six sigma. These

programs are designed to reduce the amount of waste that is created when you are manufacturing your products. These programs increase your productivity because they get rid of waste and poor quality, which means you are producing more quality products and you are not wasting time or energy on production costs.

Cont.
Decreasing the cost of your manufacturing is the quality of the final product. Many companies lose money on warranty items. But ensuring that you are manufacturing the highest quality products

2) Review Standard Operating Procedures

It is important to re-evaluate operational processes from the bottom to the top, and make changes like trimming unnecessary steps that were needed before but are not anymore, or making new changes to labour functions.

3) Use Technology
A proper adoption of the right technology products for your business can save you money in the long run. It

is important for business owners and managers to stay informed on the latest technology products in their industry.

4) Convince the client

The Cold Cuts Ltd needs to convince Secconz and tell them that product is far better quality than nearest competitor that is why Cold Cuts sell the product with high price. If you want to be the "lowcost leader", you must be priced lower than your competition.

RECOMMENDATION
After review all the option of the solution, we strongly to

recommend choosing solution for first problem which is:

Cutting overhead manufacturing cost and revise the

pricing strategy. In our opinion, this is the more suitable recommendation for problem of the price for component is over material cost as said by Mr. Nelly from Secconz. We choose this solution because this step is being able to save costs and also be able to save in terms of time such as no need to waste time to run the business

Issue Issues on Other Parties

nd 2

ISSUES
United States International Trade Commission saying that CC is pricing their products much lower than the fair value (dumping).

OPTIONS
Seek for legal advices, World Trade Organization (WTO). Paying the huge antidumping tax.

RECOMMENDATION
Seek for legal advices about the anti-dumping tax and revise the product price and refer with the Anti-Dumping Agreement.

Reference: www.wto.org

ISSUES Staff of United States International Trade Commission want some bribes.

OPTIONS Take action towards the person that making bribe. Ignore the person.

RECOMMENDATION Take action towards the person such as, report to their top management of United States International Trade Commission and report to local authorities.

FINANCIAL ANALYSIS

Selling price to Secconz

Per Unit ($) Direct materials Direct labour Direct costs Factory Overheads Manufacturing cost Margin before machinery depreciation and administration costs Selling price 40 10 50 8 58 82 140

Annual sales = 25,000 units X $140 = $3,500,000

Margin = 25,000 units X $82 = $2,050,000

Selling price to European customers

Per Unit ($) Direct materials 40

Direct labour
Direct costs Factory Overheads Manufacturing cost Margin before machinery depreciation and administration costs Selling price

10
50 8 58 42 100

Annual sales = 50,000 units X $100 = $5,000,000

Margin = 50,000 units X $42 = $2,100,000

SWOT ANALYSIS

STRENGTH Have specializing in refrigeration components. Develops own brand Fuzzy Frost. Product were exported worldwide.

WEAKNESSES Higher price. Dont have proper price strategy. The cost of manufacturing is higher. No proper knowledge on antidumping.

SWOT ANALYSIS
OPPORTUNITY Expansion to China Invest in new market THREAT The competitor produce same product with cheaper price China. Bribery. Will loss the biggest customer Secconz.

RECOMMENDATION
OVERHEAD MANUFACTURING COST Cutting overhead manufacturing cost and revise the pricing strategy. PRODUCT PRICE They need to seek for legal advices about the anti-dumping tax and revise the product price by refer with the Anti-Dumping Agreement. BRIBERY Take an action towards the person who proposes the bribes such as, report to their top management of United States International Trade Commission and also report to local authorities. THE COMPANY The company should implement a strategy for combating possible the practices of bribery includes organizational measures, measures concerning corporate management and staff and, very importantly, monitoring measures adapted to the size of the company and the markets and / or sectors in which it is operating.

QUESTION
Page 48 1-5

QUESTION
1) Explain to the board how the problem with Secconz can be damaging financially.
As we know Secconz is a major customer of CC, losing of Secconz will give a big impact to the financial of the company especially in their revenue. The revenue of CC will drop about one third of the existing revenue stream. If this happens it will affect the company profit as well.

2) What are the strategic options for the CC Board?

The strategic options for the CC Board are cutting overhead cost in manufacturing and revise the pricing strategy, review their company Standard of Procedures (SOP), used new technology and convince the client.

3) What are CCs reporting obligations?

Section 45 of the Companies (Auditing and Accounting) Act

2003 will, when commenced impose an obligation on directors of certain companies to prepare statements on their company's compliance with its relevant obligations. Relevant obligations consist of all obligations under the Companies Acts and under tax law, together with obligations under certain other enactments. In addition to the obligations specified, a company is obliged under a number of provisions to do certain things when so required by notice from the Revenue Commissioners or one of their officers.

4) What are the implications on the financial statements? What accounting standards are relevant to present a better picture of the CCs performance and valuation of its assets?

The financial statement show that the sales will drop if Secconz going to reduce the price lower than the price they pay. Although they reduce the price but the quality of the products they use are still in a high quality. So, to overcome this problem, the CC must deduct the cost of the operation department such as reducing employees. Thus, they are still able to maintain their profitability.

5) How should the request for a bribe be handled and what are the potential consequences of the various options open to them?

By take action towards the person such as, report to their top management of United States International Trade Commission and report to local authorities. For example, report to SPRM in Malaysia. In international stage, we also can refer to INTERPOL, FBI, and IAACA or known as International Associate of AntiCorruption Authorities). The consequences of a conviction for bribery can be very severe. Even as a first time offender, bribery can lead to felony charges being brought against you, meaning large fines and imprisonment. The government will pursue cases involving bribery with the sole purpose of proving your guilt, regardless of your true intent.

Reference
http://www.fbi.gov/birmingham/about-us/priorities/priorities http://www.interpol.int/Crime-areas/Corruption/Corruption http://www.sprm.gov.my/bidang-kuasa.html http://www.iaaca.org/AntiCorruptionAuthorities/html

Thank you

ANY QUESTION ?