Question
Bata Ltd has for many years produced both leather and synthetic shoes, but in contrast to Green Cross their products have been aimed at the
Bata Ltd has for many years produced both leather and synthetic shoes, but in contrast to Green Cross their products have been aimed at the lower end of the market. They have differentiated their products on the basis of price. Bata is now considering opening a new product line which will fall under the label Voga. This new line will comprise high quality, stylish shoes which will appeal to the high end of the market.
In order to make this a reality, machinery will need to be imported from Italy. The machinery will cost 50 000 Euro. The current exchange rate is 18.40 Rand to 1 Euro.
It is expected that 10 000 pairs of shoes could be sold every month once production is in full swing and the marketing campaign has had time to establish the brand. The first months production would have to be stockpiled in order to have sufficient stock to place on the shelves of retailers throughout South Africa. It is expected that during the following month 5 000 pairs would be sold and thereafter the full production of 10 000 pairs could be expected to sell monthly.
The costs and revenues for the average pair of shoes are as follows:
| R |
Revenue | 300 |
|
|
Sole | 50 |
Leather (Note 1) | 90 |
Variable manufacturing overhead | 20 |
Note 1
In order to get good quality leather at this price, Mr Botha has made an agreement with an employee of a local leather supplier whereby the supplier will charge Bata for average quality leather, but the employee will make sure that high quality leather is sent to Bata. The employee works in the distribution centre of the leather supplier and so is able to influence the quality of the leather sent to customers. Good quality leather would normally cost 20% more than average quality. In exchange for this service Bata will supply the employee and his family with free shoes whenever they need them.
Other costs include:
Fixed manufacturing overhead
Fixed manufacturing overhead including depreciation is R300 000 per annum.
The marketing campaigns
R1 000 000 will be spent at the start of the project (1 July 2022) in order to launch Voga into the market. Thereafter R10 000 will be spent monthly in an ongoing campaign to establish the brand.
The Production Manager
As the production process is very complex Mr Zaphther has been asked to emigrate from Italy to South Africa to head up this project. He will be paid an annual salary of R310 000 and his moving costs of R350 000 will be paid by Bata on 1 July 2022.
Design
All shoes will be designed in Italy, it will cost R200 000 for every new design. Only 50 000 pairs of shoes in each design will be produced.
Labour
Labour costs are very difficult to estimate. These high-quality shoes will take twice the amount of time to manufacture per pair than the school shoes produced by Bata. The fixed portion of the labour cost however is expected to be the same as for the production of school shoes.
The following data from the current production of school shoes is available to you.
Month | Production Pairs of shoes | Labour cost R |
January | 90 000 | 4 040 000 |
February | 75 000 | 3 600 000 |
March | 95 000 | 4 500 000 |
April | 84 000 | 3 900 000 |
May | 94 000 | 4 550 000 |
- Once full production and sales have been reached calculate how many pairs of shoes Bata would need to sell in order to break even every year.
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