ABCLtd is a medium size company manufacturing two electronic household products – X and Yfor the last 10 years. It has been operating in a market where four other companies produce and sell products which are similar to those of ABCLtd. For the last few years, ABCLtd has been enjoying 40% of the market share until the end of 2014 and has been known as a reliable company.
Starting from the beginning of 2015, ABCLtd’s sales volume has been slowly declining and by the end of 2015 the amount of sales for the year was 5% less than its 2014 sales. Naturally, ABCLtd’s management got concerned and appointed a new chief financial officer (CFO) and put the CFO in charge of ABCLtd’s Finance Department. The Company wants to:
(a) regain its lost market share, and
(b) increase its market share to 45% of the total market by 2021.
The CFO has been asked to come up with a strategy to regain and increase the Company’s market share as stated above under (a) and (b).
Information on ABCLtd.’s 2015 operations is presented below.
In 2015 ABCLtd produced and sold 12000 units of product X and 24000 units of product Y. The actual prices and costs per unit of the products for the year 2015 were as in the table below.
| Products | X | Y | |
| Selling price | $22.00 | $45.00 | |
| Variable costs | $15.00 | $25.00 | |
| Fixed Costs | $450,000 |
Additional information on ABCLtd:
1. Variable costs for product X includes
{(direct manufacturing materials cost of $4.50 per unit), (direct manufacturing
labour cost of $8.00 per unit), and (variable overhead cost of $2.50 per
unit)}. Similarly, variable costs for
product Y includes {(direct manufacturing materials cost of $10.00 per unit),
(direct manufacturing labour cost of $12.00 per unit), and (variable overhead
cost of $3.00 per unit)}.
2. A close scrutiny of the manufacturing costs incurred in producing products X and Y during 2015 revealed that for product X: the actual direct materials cost per unit was above the budgeted cost by $3 per unit of which $1 was due to the material’s market price, whereas direct labour actual cost per unit was below the budgeted cost by $3.00 per unit due to efficiency in materials usage. For product Y the actual direct materials cost per unit was the same as budgeted costs per unit, whereas actual direct labour costs per unit exceeded the budgeted cost per unit by $4.00 (of which, $1 was due to increased labour rate and $3 due to inefficiency).
Required
Assume that you are the newly appointed CFO of ABCLtd. Given the information above:
(1). Explain with justifications your assessment of the Company’s 2015 performance based on the data and information provided above. Show your computations supporting your assessment on an attachment. DO NO WRITE MORE THAN 70 WORDS. 5 marks
(2). Identify and explain with back-up data/justification how ABCLtd may be able to regain its lost market share and increase the share to 45% by 2021. Explain how your suggested action(s) will achieve the Company’s objectives. Show your computations supporting your assessment on an attachment. DO NO WRITE MORE THAN 70 WORDS. 5 marks
Solution
Question 1: ABCLtd Performance
It is evident that there was a significant decline in ABC Ltd.’s overall performance because the company had a projected operating income of $210,000 for 2015 when it actually generated $114,000. This decline can be attributed to the increase in direct material cost for product X from $1.50 per unit to $4.5 per unit and direct labour cost for product Y from $8.00 per unit to $12.00 per unit.
Question 2: How ABCLtd may be able to regain its lost market share and increase the share to 45% by 2021
The company should adopt cost minimization strategies to ensure that variable costs are maintained at a minimum. This would result in a decline in direct material cost for product X, from $4.5 to $2.5 and direct labour cost for product Y from $12 to $9. The proposed costs are both $1 higher than the budgeted costs due to market forces. This would result in a 52.63% increase in operating income.
Reference
Wood, F., Sangster, A. (2018). Frank Wood’s Business Accounting. United Kingdom: Pearson Education Limited.