Case Study 1 Strategy - Strategic Management and Performance Systems

Black Eagle Pty Ltd makes premium range dog biscuits used to provide high level nutrition for dogs, which it introduced to the competitive premium dog food market in 2016. Premium dog foods cost 3 times more than the supermarket brands of dog foods. Black Eagle realises that it would be competing against well-known brands that have held a significant market share, based on their reputation, for many years. From the feedback received at trade fairs during 2017, Black Eagle has been generally regarded as an equal or better standard of quality than the other premium providers. However, the product was initially provided at a low introductory price to encourage customers and retailers to purchase Black Eagles dog food. Black Eagle is now seeking to increase the price each year as the firms reputation grows.

Black Eagle produces very few defective products and insists upon the highest quality materials from its suppliers. Conversion Costs in each year depend on production capacity defined in terms of units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Black Eagle can support, not the actual number of customers it serves. See Table 1 below for information.

REQUIRED: (30 marks)

1. Identify whether the business strategy adopted by Black Eagle Pty Ltd is a product differentiation or cost leadership strategy. Explain briefly how you reached your decision on the type of business strategy adopted. (2 marks)

2. Calculate the operating profit for the two accounting years. (4 marks)

3. Prepare the variances for the change in profit between the two years due to the growth strategy (14 marks)

4. Prepare the variances to reconcile the change in profit between the two accounting years due to the productivity strategy. (5 marks)

5. Discuss the change in Black Eagles operating profit for the two accounting years.(5 marks)

Table 1 - Performance and cost details for 2-year period Number of bags produced and sold Selling price Direct materials (total number of kgs per year) Direct materials cost per kilogram Units of Manufacturing practical capacity Total conversion costs Conversion indirect overhead cost per unit of capacity (Standard fixed capacity cost per unit) Customer number capacity for selling and customer-service Total selling and customer-service costs Selling and customer-service capacity cost per customer (Standard fixed capacity cost per unit) 2018 2019 14,500 16,000 $126 $140 560,000 672,000 $2.00 $2.10 16,000 16,000 $120,000 $130,000 $7.50 $8.13 4,000 $8,200 4,200 $7,600 $1.81 $2.05