Homework Question

Celine Ltd is an Australian company which produces household consumer durables. The Company prides itself on its efficiency, and rightly so, as it is probably one of the lowest cost producers of household consumer products in Oceania. It has a reputation for high quality, long lived products, and has built up a sound business relationship with most department stores, the main outlet for such goods, in Australia. So good are their products that Orchrist Ltd, the leading department store in Australia refuse to stock any other brand, preferring to associate their good name purely with Celine products.

Their success has encouraged Celine Ltd to expand their production capacity recently. Their very success would appear to have caused the downfall of this venture however. Because of the high standing of their products the company has already captured most of the domestic (Australian) market, and owing to the durable nature of their products the replacement demand for goods is low.

At a recent board meeting it was decided that the Company should explore the opportunity of expanding into the export market. Accordingly, enquiries were made to see if there were any opportunities to sell their products in the South Pacific region. The result of these enquiries was disappointing. The only positive response come from a group of businessmen in Tuvalu who were prepared to purchase 2,000 brush cutters but were not prepared to pay more than $880,000 for the entire order. This does not appear to be a lucrative proposition to Celine Ltd as the statement of unit standard costs and revenues for brush cutters shown below indicates.

Costs Material A (2 kilos) 46 Material B (4 kilos) 60 Material C (2 kilos) 72 Labour grade I (3 hours) 84 Labour grade Il (6 hours) 96 Variable overheads 40 Fixed overheads 80 Total unit cost 478 10% mark up on cost for profit 48 526 10% mark up on selling price for goods 53 and services tax Invoice price customer 579