Question

The cosmetics division of Valles Global Industries (VGI) sells a special type of organic perfume that is highly sought after. This perfume sells for $150 per 75 ml bottle. For many years, they have sold in Asia through a Seoul-based importer by the name of Park Beauty Products. Their contract with Park Beauty Products is up for renewal and VGI has decided to look at options. You are in charge of making a recommendation.

Option 1: Continue to sell through Park Beauty Products by selling them the perfume in bulk loads of 750 liters at a cost of $150 USD per liter. Let them handle everything at their cost.   VGI receives a net payment of $15 USD per bottle.

Option 2: Sell a license for production to SohnCo Fragrances of Seoul, Korea. They will also manage marketing and distribution of the perfume. SohnCo Fragrances will charge VGI a fixed fee of $2 million USD per year to cover marketing costs. SohnCo Fragrances will pay VGI $25 USD per bottle of VGI products it sells in Asia.

Option 3: Create a new enterprise, VGI Asia, by building a small plant for $15 million USD. Annual fixed costs are estimated to be $1.5 million USD and variable costs are $0.60 per bottle.

USD—United States Dollar

Develop a five-year forecast for each of the three options. Assume there is no inflation and do a pre-tax analysis.   Develop a cash flow forecast assuming sales remain variable at somewhere between 1, 700,000 bottles and 2,000,000 bottles per year. Make and support a recommendation as to which of the options to employ.

Answer 1

Sales are in variable between 1700000 to 2000000 Bottles per year
So let us assume sales are 1700000,1775000,1850000,1925000,2000000 bottles in 1to 5 years respectively
Option 1
	Cost per litre		150 USD
	Cost per 75 ml Bottle		11.25 USD
		Year 1	Year 2	Year 3	Year 4	Year 5	Total
Sales(Units)		1700000	1775000	1850000	1925000	2000000
Net sales @ $ 15 per Bottle		25500000	26625000	27750000	28875000	30000000	138750000
Cashflow		25500000	26625000	27750000	28875000	30000000	138750000
Option 2
		Year 1	Year 2	Year 3	Year 4	Year 5	Total
Sales(Units)		1700000	1775000	1850000	1925000	2000000
Sales (amount) @ $ 25 per Bottle		42500000	44375000	46250000	48125000	50000000
Less: Fixed cost		2000000	2000000	2000000	2000000	2000000
Cashflow		40500000	42375000	44250000	46125000	48000000	221250000
Option 3
		Year 1	Year 2	Year 3	Year 4	Year 5	Total
Sales(Units)		1700000	1775000	1850000	1925000	2000000
Sales (amount) @ $ 150 per Bottle		255000000	266250000	277500000	288750000	300000000
Less: Variable cost @ 0.6 per bottle		1020000	1065000	1110000	1155000	1200000
Contribution		253980000	265185000	276390000	287595000	298800000
Less: Fixed cost		1500000	1500000	1500000	1500000	1500000
Cash inflow		252480000	263685000	274890000	286095000	297300000	1374450000
Cash out flow
Plant cost		15000000
Net Cash in flow		1359450000
option 3 is better to choose because of higher cashflow