The Ren-Ki Division is one of the newest divisions of Ekido Singapore Limited owned by a group of investors based in Japan. It was formed about a year ago when a previously manufacturing company (Ren-Ki Limited) was acquired and became a wholly-owned subsidiary of the group.

Ren-Ki Division manufactures and sells kitchen electrical appliances such as toasters, kettles and other small appliances. A major strategic objective of acquiring Ren-Ki Limited was that the company had a successful track record for several years in promoting theRen-Kibrand name under which all of its products are sold.

The division has undertaken product development of a new type of food processor and the result was promising. Manufacturing will begin shortly. Management has made the following estimations:

Estimated variable manufacturing costs per unit = $25

Estimated fixed costs per year = $60,000

After much market survey and research, management has decided to distribute the food processor under theRen-Kibrand name at a price of $60 per unit with the following estimated probability: Number of units expected to be sold in the coming year under this distribution strategy

Number of units sold: 8,000 10,000 12,000

Probability: 0.25 0.50 0.25

However, E-Trading Ltd which operates a chain of consumer electrical retail stores has approached Ren-Ki with an alternative distribution strategy. E-Trading has offered to distribute the new food processor but under the following conditions:

• Ren-Ki will not sell the food processor using its own brand name but instead supply the product to E-Trading Ltd

• The product will be labelled under E-Trading Ltd brand name

• E-Trading wants exclusive distribution rights (i.e. Ren-Ki will not distribute the product through any other outlet)

• E-Trading will pay Ren-Ki Division $48 per unit with no commitment to buying any particular quantity

Nevertheless, E-Trading Ltd has estimated the following annual sales of the food processor from its stores:

Number of units sold: 12,000 20,000

Probability: 0.40 0.60

Required:

1. Evaluate critically which of the two distribution options for the food processor should be chosen. Your evaluation should be supported by clear and appropriate calculations where risk should be taken into consideration in deciding which option to take.

(34 marks)

1. Discuss other relevant strategic and qualitative issues to be considered in arriving at the decision.

(16 marks)