ABC Limited produces frozen ready meals for the catering market. Its Greenlight Division is developing a growing range of meals containing less fat, salt and sugar designed to meet the 'green traffic light' standard for food labelling, allowing outlets such as pubs and canteens to market them as a healthy option. After early successes, the next phase of the project is the roll out of the full product range in their national market, and the introduction of the bestselling items across Europe.

ABC has already invested heavily in the development of the new range and the finance manager has requested an analysis of the risks involved in this next phase, before further funds are committed.

The finance manager has received reports that one of the division's production lines has had an on-going problem with poorly packaged meals and she is concerned that the cause is a maintenance fault that could affect other lines and ultimately impact the campaigns' success. Previous findings suggest that 3% of the time lines are not properly maintained. When properly maintained, 95% meals are packaged correctly compared to only 30% of meals when they are maintained poorly. These results have been tabulated below.

Machine maintenance

Good

Poor

97%

3%

Food packaging

Correct

Faulty

Correct

Faulty

95%

5%

30%

70%

Preliminary investigations of the production line show that on the day of testing the first meal produced was correctly packaged. Marketing research suggests that success in the national market depends on two key factors, the level of advertising spending and the speed of economic growth over the next six months.

With high marketing spend, net returns are predicted to be Rs. 15,000, Rs. 48,000 and Rs. 92,000 depending on whether the recovery is slow, moderate or rapid respectively. With medium marketing spend predicted returns are Rs. 30,000, Rs. 43,000 and Rs. 77,000 respectively and low marketing investment would lead to respective predicted returns of Rs. 22,000, Rs. 44,000 and Rs. 51,000. Data from previous periods, show that in 58% of the periods under review growth was slow, 26% of the time it was moderate, and it was rapid 16% of the time.

However, treasury forecasts are available which predict the expected rate of growth for the next six months and ABC are considering whether to use them to determine which marketing campaign to follow. Unfortunately, treasury forecasts are not wholly reliable.

The two key uncertainties affecting the success of the European launch are the strength of the euro against the dollar and the likelihood of the European Parliament backing the revised traffic light system currently before it for consideration.

Required:

Assess environmental impact on the company with the help of Internal & External Environmental analysis.(15 marks)

Part (b)

Few years ago Company introduced line of product with name City Donair to be sold locally through company's already established outlets. The present cost to produce a donair is as follows:

Rupees

Direct Material

440

Direct Labour

210

Variable Overhead

55

Fixed Overheads

-Depreciation

60

General overheads

30

Total cost per unit

795

The company produces and sells 400,000 units annually. The equipment being used for production of Donair has worn out completely and requires replacement. The company is presently considering the following options:

1. Purchase new equipment which would cost Rs. 240 million and have a useful life of six years with no salvage value. The company uses straight-line method of depreciation. The new equipment has the capacity to produce 600,000 units per year. It is expected that the use of new equipment would reduce the direct labour and variable overhead cost by 20%.
2. Purchase from an external supplier (less renowned in the market) at Rs.730 per unit under a two years' contract. The total general overheads would remain the same in either case. The company has no other use for the space being used to produce Donairs.

Required:

Which course of action would you recommend and why to the company assuming that 400,000 units are needed each year? (Show all relevant calculations) (10 marks)