Oblong Company is a well-established UK company with a stable workforce. It currently produces 2 products, but costs are too high for the current level of sales, and the Operations and Finance Directors have been working together on a plan to increase efficiency and reduce the variable costs for both products by 10%. Fixed costs are allocated 50:50 to the two products because they use equal equipment in the factory. The costs considered as fixed are those that could not be changed in the medium term period being considered here, while staff costs could. Unfortunately the plan will mean having to reduce the number of staff.

One of the two Product Managers has proposed an alternative plan an idea to manufacture a new product. The efficiency changes could be made as planned, but instead of reducing staff, the staff would move to work on the new product instead. It could be made with the existing machinery, using spare capacity. Overall fixed costs would remain the same but a share of them would go to product C in proportion to the capacity used. The variable costs for C would be the same as the total variable cost savings planned for products A and B. The sales manager thinks the company could sell 18 million of new product sales to existing clients, as it would improve the overall package the company offers to them.

You are the HR Director. You will be attending a board meeting to help decide whether to simply make savings, or to also manufacture the new product as well. The Finance Director has circulated a financial summary to help board members to prepare. Remember, you should take into account your own knowledge in HR as well as the financial information provided when making decisions. You should not assume that all the information you need will be presented in the business case.

Table 1. The Finance Manager summarises the current costs:

Product	A m	B m	Total m
Sales Revenue	180	162	342
Variable Costs	103	94	197
Fixed Costs	68	68	136
Net Profit/Loss	9	0	9

Table 2. The costs if the cost cutting measures are put into place (reducing variable costs by 10%)

Product	A m	B m	Total m
Sales Revenue	180	162	342
Variable Costs	92.7	84.6	177.3
Fixed Costs	68	68	136
Net Profit/Loss	19.3	9.4	28.7

Table 3. The costs if the efficiency changes are made and the new product is produced.

Product	A m	B m	C m	Total
Sales Revenue	180	162	18	360
Variable Costs	92.7	84.6	19.7	197
Fixed Costs	68	54.4	13.6	136
Net Profit/Loss	19.3	23	-15.3	27

1. What is a potentially important one-off cost of making the cost savings without making the new product? The Finance Director does not appear to be taking this into account.

2. Working out the Contribution of each of the products might help you to make a decision about manufacturing the new product. What would the Contribution be for each of the three products in Table 3?

Contribution for A =
Contribution for B =
Contribution for C =

3. The sales revenue of 18m has been suggested by the Sales Manager for sales to existing customers. If you sold more of the product to more people, would that make the financial situation better or worse? Why?

d. Let us assume the Variable Costs for product C could not be reduced further. Sales revenue is calculated by multiplying Price by Number Of Units Sold. So which of these elements needs further research? (If it could be increased, the financial case for product C would look much better.)

e.Assuming the finances of product C could be changed to make a small Contribution, what are some arguments to favour manufacturing product C, even if the organisations overall profits would be no greater based on the sales projection of C so far? (Not all arguments have to be financial. Brief bullet points are fine.)