Nabila Company: Part A

The Nabila Company is a major distributor of 2-plate electric stoves in the Southern African market. Over the last decade, the supply of stoves from the Chinese and Korean markets have been able to infiltrate the market, thereby setting prices that are lower than prices set in the local market. Like other local suppliers, the Nabila Company has relied on the supply of locally-produced raw material as part of a Southern African Development Community [SADC] initiative aimed at promoting goods produced by local businesses, and protecting the market share of participants in the local market. It had been the view of customers that stoves produced in the local market are generally of superior, and that this is the result of support given to local businesses by SADC.

Recently however the quality of the imported stoves has improved substantially, as has the logistical supply routes between China and the African continent. The Managing Director of the Nabila Company, John Lolita, is concerned about the viability of the company at the lower prices. He subsequently hired you as the company management accountant, and asked that you investigate the situation.

On the first day at work you asked for information relating to sales made by the Nabila Company and by its competitors. The following summary is provided by the companys market analyst:

Company	Head Office Location	Price Per 2-plate electric stoves	Market Share
Hentex Stoves	Kenya	P2,210.00	10%
Felix Energy	Lesotho	P2,300.00	15%
Xoi Long Lights	China	P1,500.00	35%
Nabila Company	Botswana	P2,800.00	10%
Xio Pungu	Korea	P1,200.00	30%

Your initial investigation indicates that the higher selling prices cannot be sustained in the current market conditions. The Nabila Company currently sells 210 electric stoves monthly, and estimates that a price reduction of 10% will increase sales by 3 %.

Required:

[a] Determine the total number of units sold that will be sold in the market if the price reduction is implemented. [3]

[b] Discuss the general relationship between prices and market share in the sale of 2-plate electric stoves, recommending any two [2] strategies that the Nabila Company can employ to improve its market share. Discuss the limitation of each of the strategies . [5]

Nabila Company: Part B

You take a decision to overhaul production and sales activities by outsourcing raw materials from Eastern Europe, and to reduce the selling price of stoves to P1,400.00 per unit. A market research team is then set up to collect and analyse data relating to costs that will be incurred the production of the new and improved 2-plate electric stoves. Part of this overhaul necessitates the acquisition of new equipment, as well as recruiting qualified technicians and sales personnel.

The new production processes manufactures stoves in batches of 24 units. The following production-related costs have been collated from market research activities:

Direct Materials required for Production of a Batch of 24 Electric Stoves	Costs per Batch of 24
Solenoid	P420.00
Taena Caps	P640.00
Spiral Metal	P528.00
Cue Knobs	P720.00
Heat Adjustment Rod	P840.00

Product finishing costs are incurred in batch 20 units as follows:

Direct Materials required for Finishing a Batch of 20 Electric Stoves	Costs per Batch of 20
Drip Pan metal	P800.00
Chrome Finishing	P480.00
Glazer	P120.00

The labour costs incurred in painting and finishing off the stoves are P14.50 per stove.

Sales personnel employees are paid P50.00 for every stove that they sell.

Fixed costs:

Cleaners Contact : P12,500 a month

Equipment Rental per month: Casting Machines at P720.00 per machine for 5 machines

Rental of new facilities: P120,000 per annum

Building Insurance: P180,000 annum

Accounting and legal costs: P30,000 per quarter

Licenses and permit fees: P2,200 a month

Maintenance services: P4,000 a month.

Office supplies: P300 per week.

Salaries and other employee costs:

• Four [4] technical employees receive a monthly salary of P4,300 per month
• Management salaries are P420,000 per annum

The revised selling price of P1,400.00 per stove has been approved by the management team.

Required:

[c] Determine the variable production costs per stove. Also determine the total fixed costs of production. [6]

[d] Determine the break-even point for the sale of stoves [per month]. [3]

[e] Estimate the number of units to be sold in order to earn a profit of P130,000 [2]

[f] The Nabila Company wishes to develop a Balanced Scorecard for the company. You have been assigned the task of developing three [3] measures for the Organization Capacity Perspective, as well as an initiative for each of the three initiatives that you come up with. [6]

[g] Explain how the Nabila Company can use target costing and pricing to achieve its intended strategy of growth as it moves towards competing directly with other companies in the market. [4]