Professional Documents
Culture Documents
Introduction
Merrion Products Limited is a company owned by the Carroll family. The company
manufactures hand-made chocolate biscuits from imported South American cocoa,
which are sold to a small number of large retail outlets in the local area. When the
company was founded some years ago, a single plain chocolate biscuit (Type A) was
manufactured and resulting profits were adequate to satisfy the family shareholders.
A few years later, it was decided to introduce new chocolate biscuits, using the same
cocoa, but refined in different ways to suit different consumer tastes. These
additional products are referred to (hereunder) as Type B, C and D respectively and
each are sold in the same size biscuit tin. The company is now the brand leader in the
segment for home-made, quality biscuits made from real cocoa and the company
has always been able to meet demand for its four products.
Members of the Carroll family agree that the company's profitability was mainly
attributable to two factors. The first factor was the high quality of its products with a
guaranteed delivery date to various retail outlets. Michael Carroll, the managing
director of the firm, often boasted that the number of customer complaints in any
one year could be counted on the fingers of one hand. The second reason for its
success was due to subtle marketing and presentation so that each product type was
perceived by potential customers as different. While the ingredients and production
methods were similar, they were not considered complementary products and each
had their own brand loyalty. Thus, the sales of one product could fluctuate without
affecting the sales of the other products, or the refusal of orders for one product
would not lead to cancellation of orders for other product types.
An important feature of each biscuit type was that the chocolate coating was made
from the best South American cocoa available. Until recently this raw material was
At the start of the meeting Michael Carroll explained, "Unfortunately our worst
suspicions have been confirmed. I saw things at first hand and also had discussions
with our Embassy officials. I made direct contact with our usual supplier of cocoa and
he indicated that, at current prices, he will be unable to deliver more than €72,000 of
raw materials per quarter until conditions improve. Simply, the supply of cocoa is
restricted due to the current political situation in the host country and a bad harvest.
Since my return home I have made extensive enquiries regarding possible alternative
supplies but they are not available in the short-term. We've just got to accept it for
now!"
Una Carroll, the only daughter in the family, filled the role of company accountant.
After obtaining a business studies degree she joined the family firm. Her role was to
monitor progress against budget targets. Generally, the actual financial performance
met the budget targets pretty well. Una knew from experience that as long as
budgeted profit was higher than last year then everyone was happy. However, the
budget setting process for each quarter was unsophisticated in that output levels
were determined by amiable consensus among family members. Preference was
usually given to the highest priced product type since this procedure maximized sales
commission for the family members. After discussion she argued that “our budgets
for the next quarter shall have to be carefully prepared”. She circulated basic cost
and operating data for the forthcoming quarter, based on previous estimates (Exhibit
1).
Una continued "In my opinion there is little scope for any reduction in costs. We
can't change, at least in the short term, our direct material costs. All our other
production costs are already down to an absolute minimum. Sales commission is the
only thing that we could effectively cut."
Michael Carroll interjected. "No, I recommend that the sales commission be left
alone. We're all in this venture together and I reckon we're going to have to sell our
way out of our problem. We should keep our selling prices intact and we need to
retain the incentive to sell as much as we can."
Everyone agreed. Patrick Carroll, the eldest member of the family, who acted as the
marketing manager, raised the possibility of maximum sales levels of each product,
given that current selling prices were to be maintained, due to contracts already
signed and said: "We must take into consideration that there is a limit on the amount
of goods that we can sell at existing prices next quarter." Michael Carroll accepted
that the point was valid. After much discussion all family members agreed that the
maximum sales value of each product at current prices for the forthcoming quarter
would be as follows:
Product type €
A 60,000
B 88,000
C 63,000
D 40,000
Subsequently everyone at the meeting realized that the shortage of cocoa would
restrict production so that the above (maximum) sales could not be achieved.
Michael Carroll added "I think we shall have to be more selective in what we produce
in future. However, I recommend that we produce a minimum of 1,000 tins of each
product during the forthcoming quarter. This would comply with legal agreements
which we have already signed for the next quarter and also keep the company's
products in the minds of the public. Una, now is the ideal time to put some of that
theory of yours into practice. If you feel that there is a single, best way to utilize our
production facilities in these circumstances now is the ideal time to let us know."
Everyone agreed and the meeting adjourned.
Requirements
2. Calculate the firm's break-even point for the forthcoming quarter, based on
your calculations in 1. above. What fundamental assumptions have you
made?
4. Assuming it was possible to increase all selling prices by €7 per tin without
influencing demand, would this price increase impact on your analysis?
Explain. (It is not necessary to rework your optimal production plan).