As the Management Accounting representative you have provided the Strategic Management Committee with the following breakdown of revenues and costs for the TeaserMalt product line for the just completed 2020 financial year:

TeaserMalt ChocolateBalls
Total Assets: TeaserMalt Factory - Bendigo, Victoria	$52 million
Total Sales (Volume)(50 pack units)	60 million
Regular Retail Price (per unit) (price sold in supermarket)	$4.950
Retail Margin (per unit) (Supermarket Gross Profit per unit)	$1.4850
Gross Sales Value (per unit) (Price received by TeaserMalts)	$3.4650
Supermarket Rebates (per unit)(Paid by TeaserMalts)	$0.150
Net Sales Value	$3.3150
Prime Costs	$1.250
Manufacturing Costs	$1.200
Logistic Costs	$0.650
Total Costs (per unit)	$3.100
Gross Profit (per unit)	$0.215
Total Gross Profit	$12,900,000
ROTA	24.81%

The Return on Total Assets (ROTA) (calculated by dividing Gross Profit by Total Assets) for TeaserMalts for the 2016 year was 24.81%. This is marginally below the required ROTA of Jupiter Australia Limited which is 25%. It is noted by the Committee that if the product continues to lose market share it may not be viable in the very near future.

The Marketing Department has carried out research into the chocolate ball confectionery market which indicates that by discounting the recommended retail price of TeaserMalts by $0.40 per unit to $4.55 per unit^*, sales of TeaserMalts will increase by 25% from their current level. In an attempt to simultaneously lower TeaserMalts product costs the research and development (R&D) team have identified that by slightly altering the ingredients quality and mix, a saving of 20% of prime costs can be made.

However, after analysing the marketing and R&D proposal the Chair of the Strategic Management Committee advises that even after allowing for the 20% savings in prime costs, discounting the product by $0.40 per unit will mean that the product will no longer achieve the firms long term required return on total assets (ROTA) of 25%. The Chair argues that if this remains the case, the previously successful TeaserMalts product line may have to be discontinued.

You advise the Committee that you are aware that the TeaserMalts manufacturing facility in Bendigo is currently running at 69% of its practical capacity and that the warehouse facility (logistics) is running at 54% capacity. You are also aware that whilst the TeaserMalts products Prime Costs are 100% Variable, other Manufacturing Costs and Logistic Costs are made up of 90% Fixed costs and 10% Variable costs.

You ask if you can be given time to prepare a report for the Strategic Management Committee on the Management Accounting cost and profit implications of the changes proposed by Marketing and R&D based on the changes to budgeted costs and increases in sales and production.

*Remember that the manufacturer does not receive the retail price. The discounted wholesale price will be $3.0650 per unit, down from $3.4650 per unit.

Required:

1. Using the Excel template provided prepare a before and after budget comparative analysis of the revenues and costs of the TeaserMalts product line. The analysis should incorporate the $0.40 cent drop in price, the 20% predicted savings in prime costs, and include the 25% predicted sales increase. Ensure you include in your analysis any impact of the budgeted production increase on other per unit manufacturing and logistics costs (25 marks)
2. It can be assumed that 90% Fixed 10% Variable cost break-down between variable and fixed costs will hold consistently across the industry (including for competitor ChockoBalls). Assume that 75% of the predicted TeaserMalts unit sales increase will be made at the expense of the unit sales of their main competitor ChockoBalls (meaning ChockoBalls unit sales will fall by 75% of the TeaserMalts sales increase). Assume that TeaserMalts and ChockoBalls have identical manufacturing and logistic costs structures at the commencement of the 2017 calendar year.

Allowing for the change in sales volumes use Excel to calculate the expected impact of the drop in sales on the per unit manufacturing and logistic product costs of ChockoBalls (10 marks)

3. Prepare a brief report (maximum 500 words) for the Strategic Management Committee outlining the key points of your findings. Include some discussion on:

1. the likely impact of the changes on the cost and profit structure of TeaserMalts (derived from your answer to (i)).
2. the likely impact of the changes on the cost and profit structure of ChockoBalls (derived from your answer to (ii)).

Make a recommendation to the Committee on whether to go ahead with the planned changes. Include any other strategic advice that you consider relevant to the Committees decision making (for example profitability for supermarkets and likelihood of competitive response from ChockoBalls). (15 marks)

(Please ensure that your answer adequately addresses ALL of the points above)