Over the years ICBIP have witnessed decline in their sales as their competitors are providing higher customer satisfaction and value for the money. The manager of ICBIP, Ross Beckham is trying to fix the problems associated with red cinnamon and blue black. However manager has alerted the company that yellow ginger is their weakest product as it is making a very substantial profit compared to other products. Consequently Beckham has come up with possible solutions: 1. Solution "price decrement" is to decrease the price of a yellow ginger to 7. 00, which is estimated to raise their sales by 35%.
Solution "sale reduction" is to manufacture only 5000uints of yellow ginger, produce 800 units of red cinnamon and 500units blue-black pepper. 3. Solution " discard" is to abandon the product, which might make losses in the future. 4. Solution "advertisement and promotion" is to reduce price and create product awareness. If ICBIP invested 45 per annum in advertisement and with the fixed cost of 30 then sale is expected to be: 10000units @7. 00 (A)
With so many solutions in hand, manager has asked you to calculate and suggest which solution is best for him and how it can effect the company? (50 marks) Workers are paid 2 per hour and fixed costs are allocated to products according to the labour hours. ICBIP has contracted "Unlimited potatoes" to supply potatoes for red cinnamon, blue black pepper and yellow ginger for at least one year under terms and conditions. Unfortunately, Unlimited potatoes have given an urgent notice to ICBIP that it will shut down next year as they are making loss and can now provide only 40000kg of potatoes for one year. Besides this, ICIBIP has to produce 5000 blue black pepper for their wholesaler "Water Land" to keep good relations because they had supplied fewer crisps, which did not meet their agreement.
CVP in accounting is exceptionally essential because it answers all the questions relating to profits, selling price sales, labour etc. Hence I decided to put several issues into my problems that are pragmatic and companies actually face in reality for Eg. A crisps company called "Piknik" had comparable problems addressed in the question. Moreover I thought that reduction in price is a general issue, which all firms deal with, or review to keep up with the rivalry. Companies try to form strategies or solutions to cope with price of competitors and engage themselves in price war and hence I decided to place in my question.
In addition, I also determined to divide the problem into two parts in which one deals to test the application, the decision making of the student and other deals with the knowledge of CVP. What's more, I have laid down the figures like existing sales, selling price, variable cost contribution, expected sales etc. This has been the most difficult part because most of the time I over estimated the figures and all answers were going haywire. When putting in the figures for each of the categories I had to make sure that the answers don't come out vague.
For the first part students were required to calculate the impacts of all the solution, which is straightforward. I came up the many solutions but preferred four of them for the first part of the problem. I have given students four different ideas totally different from each other. I thought that these four questions would bring in deep analytical skills of the students. Their decision on the basis of their calculations is a vital factor in this judgment of the answers. "Discard" solution might be a bit confusing for students as they might think how go about solving the problem.
It gets tricky actually because students are required to calculate normally how ICBIP operates by allocating its labour hours and find the profit. There after students have to compare with other solutions to see whether this is appropriate solution or business should carry on the way it is. In advertisement and promotion solution students are required to calculate and compare the breakeven and margin of safety for both before and after invest in advertisement to decide option is the best for manager. For the second part students had to suggest which would be profitable use of limited supply.
This part is difficult then the first one, key to this question was to find contribution per kg and then finding the demand. The logic behind the second half is that with limited supply contribution can be maximized through per unit of limitations. The most important when solving the sum is that students have to assume that 1kg of potatoes is required to make one packet of crisp. With this students will not be able to solve the problem. Also after finding out two ways of calculating the use of potatoes a good student would compare his/her answers and comment on it.