: case study Instruction: Read and evaluate the Case Study of Jollibee Foods Corporation and answer the what is being asked. This is your main task, so please take time and read, understand and analyze. Your answers will be as- sessed based on rubrics presented at the end of the module. THE BUSINESS 0F SELLING BELOW COST BARNAIJ CHAKLADER | Updated on January 17, 2018 Published on July 15, 2016 (Retrieved from ht_tps:t'lwwwlbehindubusinessline.com/catalygt/the-business-of-selling-below-cost/ article8855105.ece#) \"How can etailers sell for less than cost price? There is probably some sound underlying logic\" Major players of the long established oline sector are complaining loudly about the low cost strategy of the online sector. Oflline retailers are accusing e-tailers of selling products below cost. Online retail is being nanced by private equity in a major way. If we think logically, private equity players will never invest in a business model that will result in loms. There is no doubt they want a decent return on equity. This forces us to wonder why these etailers are selling products below total cost. People's lifestyle has changed over the years and more so with technological innovations. A Comscore report says that three out of ve internet users are shopping online. The survey also says that the number of online shoppers in India is expected to rise to 56 billion by 2023. Online shopping's rapid growth and populari- ty is due to heavy discounts, convenience of shopping, growing traffic and parking problems in the metropoli tan cities. Oline retailers have understood that ecomnierce is going to give them tough competition. Fewer overheads Online retailers have a low overhead cost. Their xed costs are fewer as compared to ofine sellers as they do not have to maintain the shop with different levels of interior decoration depending on the customer segment they target to serve. Oline retailers have to hair the cost of holding inventory in the warehouses and shops, as a 'just in time' technique would not work in this type of business model. E-tailers take orders online and have tie-ups with the vendors who deliver the products directly to the customers. Online retailers incur huge cost on advertisements, offer huge discounts, cash on delivery and the cost of returning the products by the customers within a stipulated time period or even at the time of delivery of the product. Many bear huge in'astructure costs for maintaining back-end warehouse services. As per the theory of cost-volumeprot analysis, in the short run, xed cost is considered to be irrele \\UL'\" vant for decision-making as it is incurred even if there is no sale. Em- ployees have to be paid, so does rent, and the rm has to bear many 0395 other xed expenses. If the selling price per unit of the product is more than the variable cost per unit of the product then there is a posi- tive contribution margin per unit of product. The seller tries to max- imise the tour] contribution by increasing the volume of products. The total contribution is per unit contribution multiplied by the number of units sold. So, products may be sold below total cost, i_e_, - the sum of xed cost and variable cost. As long as the variable cost is MANAGERIAL ACCOUNTING MODULE | 29 less than the selling price, the rm earns a positive contribution margin. This can continue for a short duration as the rm cannot ignore xed cost for a long time. Volumes at play Online rms sell products at a low price and also negotiate on purchase price to keep the variable cost low so that they can maximise on contribution per unit and maximise total contribution by maximising vol- umes. Any extra total contribution over and above the xed cost is prot for the entrepreneur. At this point, online retailers are not obviously at a prot-making stage and the amount of discounts and the refund policy that they have clearly shows that they are considering xed cost to be irrelevant at this stage. This is a short-term strategy for them. For example: A rm has a capacity to produce 60,000 units. The price per unit of its product is ?10, variable cost per unit of product is ?6 and the total xed cost the rm incurs is ?60,000. if the rm sells all 60,000 units, total cost per unit comes to ?7 (variable cost of 36 plus total xed cost of i60,000 divided by 60,000 units) and if the rm sells 30,000 units, total cost comes to 38 as xed cost in any way has to be in- curred. The rm gets more prot by selling more products. This gives a clue to the question why private equity players are allowing online retailers to sell below cost. E-tailers want to capture the market, increase market share and customer database. Once e-tailers are successful in getting repeat customers and increase the number of buyers, they will be able to increase the total contribution margin without increasing fixed costs much as the volume of selling units will increase. Thus, the contribution margin aer meeting the xed cost will add to the bottom line or prots. Etailers can be successful if they are ethical in dealing with the customers. Otherwise they have to bleed forever and exit the market. It will be better for the offline retailers to understand the fact that e-commerce is the business model for the coming years. But this does not mean that ofine business will become extinct. Both will co-exist. Oline retailers can think of running a parallel ecommerce business. They might have the risk of having the same customer segment buying offline or online at one or the other time as per their convenience. But the business is all about risk and return and survival of the ttest. QUESTIONS: What are the challenges faced by offline sellers with the immerging e-tailing (online selling)? Answer: MANAGERIAL ACCOUNTING MODULE | 30 What prot planning benets are attained by using or engaging in e-tailing? Answer: What are the downsides of using or engaging in e-tailing? Answer: See yourself as a manager who makes decision, would you consider engaging in e-tailing? Why or Why not? Answer: MANAGERIAL ACCOUNTING MODULE | 31