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Illustration 14. (Evaluation on Strategy) Nice and warm, Ltd. manufactures and markets hot plates. During the first five years of operations, the com has experienced a gradual increase in sales volume, and the current annual growth in sales of 5% is expect continue in the foreseeable future. The plant is now producing at its full capacity of one lakh hot plates. At the monthly Management Advisory Committee meting, amongst other things, the plan of action for nex was discussed Managing Director proposed two alternatives. First, operations could be continued at full capacity and w existing facilities, an output of one lakh hot plates at a selling price of * 100 per plate per unit could be maint Secondly, production and sales could be increased by 5% to take advantage of the rate of expansion in de for the product. But this could increase cost, as to achieve the output, the company will have to resort to we and over time workings. However, a policy of steady growth was preferable to maintaining status quo, In view of the company's competitors having a substantial share of the market, the Works Director was oft that it was not enough for the company to maintain merely the present share of the total market. A large the total market should be obtained. For that, the company should increase production by 10% through a expansion of the plant capacity. In order to sell the output of 1,10,000 units the selling price could be rec =ts hot plates. During the first five years of operations, the company olume, and the current annual growth in sales of 5% is expected to now producing at its full capacity of one lakh hot plates. tee meting, amongst other things, the plan of action for next year First, operations could be continued at full capacity and with the es at a selling price of 100 per plate per unit could be maintained. ised by 5% to take advantage of the rate of expansion in demand achieve the output, the company will have to resort to weekend eady growth was preferable to maintaining status quo. ubstantial share of the market, the Works Director was of the view tain merely the present share of the total market. A large share of e company should increase production by 10% through a modest the output of 1,10,000 units the selling price could be reduced to or put forth a more radical proposal. The strategy should be to suggested that the company should straightaway embark on an expensive modernisation programme, which will initially increase volume by 20%. The entire output of 1.20,000 hot plates could be easily sold at a price of 90 per unit. At this juncture, the Managing Director expressed concern about the probable behavior of the company's competitors. They might also expand in order to produce more and sell at lower prices. Suppose this happened, he wanted also the financial effects of the proposals of the Works Director and Marketing Director, if in these proposals , the expected increase in sales were to be only half of that predicted. As a Cost Accountant of the company, you are required to critically evaluate the six alternative along with your recommendations and circulate the same to the Directors. In this connection, you have gathered the following details: if next year's production was maintained at the current year's level, variable cost would remain at 50 per unit. Fixed cost would remain unchanged at 30 lakhs. The week-end and overtime working would increase with the variable and fixed costs. Variable cost would rise to 55 per unit while fixed cost would increase to 30,25,000 In the proposal of the Works Director, the ratio of variable costs to sales would continue to be 50%. Fixed cos would rise to 32.25.000. Director as a result of increased production, efficiency and some savings fro 3 The week-end and overtime working would increase with the variable and fixed rise to 55 per unit while fixed cost would increase to 30,25,000 fim in the proposal of the Works Director, the ratio of variable costs to sales would continue to be 50%. would rise to 32,25,000. (iv) in the proposal of Marketing Director, as a result of increased production, efficiency and some so purchase of materials, it is estimated that the ratio of variable cost of sales would decrease to 4 fixed costs would increase by 5,16,000. Your answer should contain: (a) A tabular statement of comparative figures pertaining to total turnover, total contribution, Pe Profit to Sales and Breakeven units as regard to each of the six proposals. (b) Comments on the relative risk involved. (c) Consideration of the short-term and long-term implications of the Managing Director's propos (d) Comment on the price elasticity of demand for the company's products and your suggestions policy and cost structure e) Comment on financial implications of the expansion scheme. oto 333 would rise to (iv) In the proposal of Marketing Director, as a result of increased production, efficiency and some savings from purchase of materials, it is estimated that the ratio of variable cost of sales would decrease to 48% and the faxed costs would increase by 5,16,000. Your answer should contain: (a) A tabular statement of comparative figures pertaining to total turnover, total contribution, Percentage of Profit to Sales and Breakeven units as regard to each of the six proposals. (b) Comments on the relative risk involved. (c) Consideration of the short-term and long-term implications of the Managing Director's proposals. (d) Comment on the price elasticity of demand for the company's products and your suggestions on the pricing policy and cost structure le) Comment on financial implications of the expansion scheme