Managing Costs: Activity Based Management

Fun Cosmetics Ltd. is a skin care product manufacturer based in New Zealand that produces the LoveSkin instant moisturiser for women. Because of the reliability and quality of its products, it has maintained strong growth in the New Zealand market in recent years. Fun Cosmetic is thinking about expanding into the Australian market, where an identical instant moisturiser sells for an average of $90 at wholesale. Management has hired a marketing consultant to learn more about the features that Australians look for in instant moisturisers. The marketing consultant conducted market research and provided Fun Cosmetics Ltd with the following information on the features, the estimated cost of adding these features, and customer preference for the Australian market:

Features Desired in Australian market	Cost to Add (in $)	Customer Choice Rating (1 denotes the most important)
Plant extracts and colourless ingredients	$15.50	1
Perfumed chemical	14.50	3
Quick restoring skin's hydration	15.00	2
Long lasting moisturizing	13.50	4

Fun Chemical's current average manufacturing cost is $60. Fun Chemical currently makes an average profit margin of 15% on each product sold. Fun Chemical wishes to keep the same profit margin in the Australian market. However, the company recognises that in order to sell the product in the Australian market, an additional $5 manufacturing cost and a $2.00 advertising and shipping cost are required. Ignore the currency exchange rate.

Question 1

What is the target manufacturing cost for LoveSkin instant moisturiser to be sold in the Australian market without adding the new features? Should Fun Chemical Ltd. manufacture for the Australian market? Make your decision based on the target cost.

Question 2

Should there be any cost reduction target if Fun Chemical Ltd. is not considering adding any new features to enter the Australian market? Justify your answer.

Question 3

Calculate the cost reduction target separately for each feature, assuming that Fun Chemical Ltd. requires adding at least one feature to enter the Australian market.

Question 4

Based on your calculation in requirement 2.3 above, which feature, if any, should Fun Chemical Ltd. add for LoveSkin instant moisturiser to be sold in the Australian market? Justify your answer.

Question 5

Strategically evaluate Fun Chemical Ltd.'s decision to sell LoveSkin instant moisturiser in the Australian market.